How to Use Equity to Grow an Investment Property Portfolio
Are you considering extending your investment portfolio to include property?
If you own a substantial part (or all) of your residential property, you may be able to use the equity in your home to help purchase an investment property.
Equity is the part of your property that you own (the difference between the current worth of your property and what you owe on your mortgage). If you have built enough equity in your existing property, you may be able to access some of it for investment purposes.
One way to tap into your equity is by getting bridging loan (funding that ‘bridges the gap’ between purchasing your new home and selling your existing one). Bridging loans are a popular source of finance as they can be a quick and easy way to access equity during the sale period.
Total equity vs usable equity
You typically can’t borrow against the total equity you have in your property. As the name implies, usable equity is what you can actually access (which is lower than the total equity). The proportion of usable equity varies between lender to lender.
How to build your investment property portfolio using equity
Here are some tips to consider if you’d like to explore a home equity loan:
Speak to your lender
Your lender can help you determine whether you’re eligible for a home equity loan or bridging loan. Also, your lender can help you identify which loan facility supports your requirements and serviceability (ability to pay back the loan).
Determine your investment strategy
Investment properties are popular due to their potential rental yield and opportunity for capital growth. In particular, rental yield should be offset against property costs (including the mortgage, council rates, utilities, etc). The historical capital growth of the area should also be carefully reviewed, and any infrastructure, urban planning – or equally broader macro-economic factors should be taken into account that may affect future growth. It’s wise to determine your investment strategy with your accountant and finance broker.
Look for the right property
Once your investment strategy is in place, you can start looking at the available properties on the market to see which one fits your budget and preferences. You can search for the property by yourself or use a buyer’s agent to find your property. When searching and assessing properties, make sure to consider all fees and charges, such as management fees.
Increase your property value
Many investors plan renovations to help escalate a property’s value. Again, this strategy should be considered in relation to its return.
What are the benefits and risks of using equity?
The main benefit of using equity to build your portfolio is that it can be accessed relatively quickly and easily. On the flip side, a loan of any description is another monthly payment and should be carefully considered so as to not cause financial stress.
On this note, it’s essential to manage your finances appropriately and be on top of your budget – including a buffer. This is important as lenders usually assess a loan application relative to your current income and existing debts.
Using your home equity to help purchase an investment property is a common investment strategy. Bridging loans are a popular source of finance as they can be a quick and easy way to access equity during the sale period. Lenders will usualy consider the amount of equity you have in your home, as well as your income and liabilities, when assessing an application. As always, it’s wise to make any sizable financial decision in conjunction with your accountant and finance broker.
Read Also: How the Effects of Quantitative Easing Can Benefit Investment Decisions