Using equity to buy an investment property

Looking to build your investment property portfolio without blowing out the budget or putting stress on cash flow? It is possible. If you already own your own home or another investment property, you may have untapped equity which you can use to buy an investment property.

What is ‘equity’?

Equity is the difference between your property’s market value and the amount owing on the mortgage. For example if your property is worth $500,000 and you owe $300,000, your equity value is $200,000. The key piece of information to remember here is equity is based on “market value”, which means if you’ve renovated your property since the purchase, or you haven’t had it valued in a couple of years, you could be sitting on a lot more equity than you realise.

How does it work?

When purchasing another property (with a decent amount of equity already under your belt), you can access 80 per cent of your equity as security with the bank, which automatically eliminates or reduces the need for a deposit on your next purchase. This is also known as “useable equity”.

As a general rule of thumb, according to NAB, to calculate how much you can borrow from the bank -multiply your useable equity by four. So in this case $200,000 x 4 = $800,000 borrowing capacity. However, this can vary based on several variables and will depend on your bank and unique financial status.

Can you use your home to buy an investment property?

Yes. How wonderful is that? Many homeowners are in a great position to use the equity from their owner occupied property to begin building their property portfolio. However it is important to remember to pay off your personal home loan as fast as possible as this isn’t tax deductible unlike interest on an investment property which is tax deductible.

What’s next?

Like any major financial purchase, it’s important to do your research and engage with a financial professional to assist you with your long-term strategies. Understand the scope for capital gains and impact on cash flow, and ensure you don’t over capitalise and therefore put unwanted stress on your hip pocket.

Contact CPS Property today to discuss the property investment options available to you.

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