Do you want to buy an investment property but don’t know how to raise a deposit with the rising cost of living and mortgage repayments taking up all your spare cash?
The solution might be right there in your own backyard…or the backyard of an investment property already in your portfolio.
You don’t always need cash for a deposit but can rather use a portion of the value of an existing property, only if it has accumulated enough usable equity to satisfy a lender.
And many property owners would be surprised to find they have access to more equity than they thought.
See, when property markets grew in value during the pandemic years and their record low-interest rates, your home or investment property likely experienced considerable value growth. Some areas saw 30% plus growth for a house or unit values.
When you weigh that up against the current market correction, which has seen losses of less than 10% in most markets (which are now recovering with back-to-back months of growth), you should still be ahead.
And you can use your position to get even further ahead by expanding your portfolio before values recover to their 2022 peaks and begin their next growth cycle.
What is equity?
Equity is the amount your property is worth, minus what you still owe on it. Basically, it’s the portion of the property that you own outright. If you owe $200,000 on a property that’s worth $300,000, your equity is $100,000. If that property rose by another $50,000 in value the next year and you paid off another $10,000 of it, your equity would go up by $60,000.
Revaluing it can unlock that extra equity so that you can use a portion of it as a deposit for an investment.
But you can’t use it all, as banks won’t let you access the full amount to invest because it would be exposed to too much risk if there was a dip in value for your existing property or the new one that you purchase.
Instead, they will allow you to access a portion of it. Usually around 80% of your existing property’s current value, minus the debt still owing.
So, in the case of the above example property, at the beginning of this article; if it’s now worth $350,000 and you owe $190,000, your overall equity is $160,000.
But your usable equity might be $280,000 (80% of $350,000) minus $190,000. That leaves you $90,000 to invest with.
There are plenty of good investment markets in Australia where that $90,000 will give you a more than 20% deposit, plus cover upfront costs like stamp duty, on a property that will immediately return enough rental income to be positively geared…especially in the current environment of super low vacancy rates and soaring rents.
Get it while you can
Anyone familiar with Nathan Birch, founder of B.Invested and Zinger Finance, may have heard him talk about the importance of accessing your equity while you can. The reason is that if you don’t, it may no longer exist if there’s a change in market conditions.
For example, say your property rose in value to a point where you had usable equity of $300,000 by the time the market peaked last year… you could have undertaken a cash-out refinance at that point and been able to access as much as possible while you ponder your next move.
If you didn’t, however, and the market fell by 10%, you might find the bank deems your usable equity to now sit at $270,000. You have lost $30,000 before even realising you had it. That equals a deposit on an affordable investment property, or at least a pretty big chunk of one.
And of course, there’s then the flow-on effect, where you are taking that $30,000 and leveraging it into a property worth 5 times as much that returns a rental income that can help pay itself off and even deliver you extra cash into your pocket each month to further boost your investments.
I’m in… what do I do next?
First things first, talk to the experts. Zinger Finance has a team that specialises in helping people build investment portfolios by using smart financing strategies and regularly pulling equity out of their assets.
Zinger Finance can organise a valuation on your existing property. If it has increased in value since its purchase or last valuation, Zinger can walk you through the process of using that equity.
Zinger’s team can then help you get your properties valued and revalued regularly, to unlock all the further usable equity you need, at the right time to help you reach your goals.