Saving up for a deposit on your second property come seem somewhat out of reach, particularly when you’ve already got mortgage repayments to worry about.
So how are property investors managing to get their hands on the money to build their property portfolios?
The answer to this question is equity.
Equity is one of the greatest benefits of owning your own home.
It’s somewhat of a money machine where your wealth continues to grow and also allows you to develop a portfolio that builds wealth for your future.
So what is equity?
Equity is the difference between the value of your home and the amount that you owe on it.
For example, if your property is worth $600,000 and you owe $400,000 on your mortgage, then you have $200,000 in equity.
In order to correctly evaluate your equity, it is important that you establish the current market value of your property.
You can come to this estimate by comparing similar properties in your area and researching how much they recently sold for.
To gain a more accurate price, seek the services of a professional valuation expert.
How do I access my equity?
Once you’ve accumulated equity in your property, you’ll require arrangements from a lender to access this money.
There are several options for those wishing to leveraging equity and this will depend on personal financial circumstances.
You should talk to a professional mortgage broker about how you can take advantage of your financial situation.
Options you may consider are to refinance your existing mortgage and take out a large sum or establish a line of credit.
It is important to remember a lender will very rarely allow you to borrow against all of the equity you have in your property.
More likely, they’ll let you borrow 80% of this equity to make sure the loan is secure, even when the market fluctuates.
How can I grow equity faster?
A popular method of growing equity is to generate value in your property.
You can achieve this by undergoing home improvements.
This method can achieve quite a large amount of equity for relatively low capital outlay as long as you are making changes that are more desirable to potential buyers.
If you own a large block, subdivision is also a great way of accessing the equity in your property.
The smaller, subdivided block will acquire a value if its own that you can borrow against to build a house.
Or perhaps you’d like to sell this land to earn a deposit for a new investment property.
What is a good equity investment strategy?
Time is your best friend when it comes to property investment.
Over time, the equity in your property will grow as you pay off the mortgage and the market value increases.
You can use this growing equity as a deposit for a second property.
As time goes on, you’ll accumulate equity in two properties rather than just one and in turn create an opportunity to take out a deposit for a third and fourth investment property.
While you continue to pay the mortgage for your Principal Place of Residence, a tenant will be paying rent to help with your mortgage repayments each month.
Both the tenant’s financial contributions and the growth in property value will aid the growth of your total equity.
The more properties you acquire and own, the more quickly your total equity will grow.
What are the risks?
There will always be risks involved in any kind of investment.
The danger with property investment is you could borrow too much money and if the interest goes up, you will not be able to cover your mortgage repayments.
Also, if a decline in the property market were to take place, as well as a rise in interest rates, you may find yourself in a position where you’ll need to sell a property with a significant loss.
In order to reduce the risks associated with property investment, it is important to invest conservatively and seek the advice from a professional mortgage broker before you decide how much to borrow.
They can help you make the smartest financial decision and avoid getting caught out.
As this article has outlined, there are a number of considerations when you’re using equity to build your investment portfolio, which can have an effect on your long-term financial position.
Having a professional banking and finance team on your side could make all the difference to the outcome.
Subscribe & don’t miss a single episode of michael yardney’s podcast
Hear Michael & a select panel of guest experts discuss property investment, success & money related topics. Subscribe now, whether you're on an Apple or Android handset.
Need help listening to michael yardney’s podcast from your phone or tablet?
We have created easy to follow instructions for you whether you're on iPhone / iPad or an Android device.
Prefer to subscribe via email?
Join Michael Yardney's inner circle of daily subscribers and get into the head of Australia's best property investment advisor and a wide team of leading property researchers and commentators.