{"id":7811,"date":"2023-01-16T12:01:08","date_gmt":"2023-01-16T01:31:08","guid":{"rendered":"https:\/\/adelaideprivatewealth.com.au\/using-equity-to-buy-an-investment-property\/"},"modified":"2023-01-16T12:01:08","modified_gmt":"2023-01-16T01:31:08","slug":"using-equity-to-buy-an-investment-property","status":"publish","type":"post","link":"https:\/\/adelaideprivatewealth.com.au\/using-equity-to-buy-an-investment-property\/","title":{"rendered":"Using equity to buy an investment property"},"content":{"rendered":"
When it comes to investing in real estate, equity is a key concept to wrap your head around.\u00a0The Successful Investor\u2019s\u00a0Michael Sloan explains what equity is, and how you can use it to your advantage.<\/p>\n
Equity is the difference between the current value of your home and how much you owe on it.<\/p>\n
For example, if your home is worth $400,000 and you still owe $220,000, your equity is $180,000.<\/p>\n
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The great thing is, you can use equity as security with the banks. This means you can borrow against your equity to fund life\u2019s big purchases, such as:<\/p>\n
extending your home<\/p>\n<\/li>\n
starting a business<\/p>\n<\/li>\n
buying a car<\/p>\n<\/li>\n
going on a holiday.<\/p>\n<\/li>\n<\/ul>\n
You can use also use equity to buy an investment property and get into the real estate game.<\/p>\n
Banks will typically lend you 80% of the value of your home \u2013 less the debt you still owe against it. This is considered your useable equity.<\/p>\n
Since the bank is lending you money against the value of your home, they won\u2019t lend you the full amount. Put simply, if house prices dip, they don\u2019t want an outstanding loan that\u2019s worth more than your property.<\/p>\n
Keep in mind that it\u2019s possible to borrow more than 80% if you take out\u00a0Lenders\u2019 Mortgage Insurance\u00a0(LMI).<\/p>\n
Using the example above, let\u2019s say your home is valued at $400,000 and your mortgage is $220,000. Here\u2019s the breakdown of sums:<\/p>\n
value of your property \u2013 $400,000<\/p>\n<\/li>\n
value of your property at 80% \u2013 $320,000<\/p>\n<\/li>\n
minus your mortgage \u2013 $220,000.<\/p>\n<\/li>\n<\/ul>\n
This means your useable equity would be $100,000.<\/p>\n
Using the \u201drule of four\u201d<\/span><\/p>\n When it comes to actually buying an investment property, it can be hard to know where to start.<\/p>\n But a simple rule of thumb is to multiply your useable equity by four to arrive at the answer.<\/p>\n For example, four multiplied by $100,000 means your maximum purchase price for an investment property is $400,000.<\/p>\n If you\u2019re buying an investment property worth $400,000, the bank will lend against your future property just as they would against your existing home.<\/p>\n The banks will lend 80% (or $320,000) in this scenario, but the property costs $400,000. This leaves an $80,000 gap, which is your house deposit.<\/p>\n However, you also have to budget for purchase costs such as stamp duty, legal fees and more. This is approximately 5% of the purchase price \u2013 around $20,000 on a $400,000 property.<\/p>\n Therefore, the total amount of funds needed to purchase a $400,000 investment property is now $100,000 \u2013 an $80,000 deposit plus $20,000 costs.<\/p>\n Even if you have plenty of equity, it\u2019s not always a given that you can borrow against it. The bank will consider several factors including: \u00a0<\/p>\n \u00a0your income<\/p>\n<\/li>\n \u00a0your age<\/p>\n<\/li>\n \u00a0how many kids you have<\/p>\n<\/li>\n \u00a0any additional debts<\/p>\n<\/li>\n<\/ul>\n Remember to play it safe. If you don\u2019t have any funds outside your home equity, then it\u2019s risky to use every cent of your usable equity to invest in property.<\/p>\n You always need a buffer \u2013 back up funds in case things don\u2019t go to plan. Even if it means you can\u2019t invest for a while, it\u2019s important to keep yourself protected.<\/p>\n Ultimately, using equity to buy an investment property can be a smart move. But before you get serious, it\u2019s best to talk to your banker or broker.<\/p>\n Before you decide which strategy is best for you, talk to us on [phone].<\/p>\n Source: NAB<\/a><\/span><\/p>\n Reproduced with permission of National Australia Bank (\u2018NAB\u2019). This article was originally published at\u00a0https:\/\/www.nab.com.au\/personal\/life-moments\/home-property\/invest-property\/equity-to-invest<\/p>\n National Australia Bank Limited. ABN 12 004 044 937 AFSL and Australian Credit Licence 230686. The information contained in this article is intended to be of a general nature only. Any advice contained in this article has been prepared without taking into account your objectives, financial situation or needs. Before acting on any advice on this website, NAB recommends that you consider whether it is appropriate for your circumstances.<\/p>\n \u00a9 2022 National Australia Bank Limited (\u201cNAB\u201d). All rights reserved.<\/p>\n Important: The post Using equity to buy an investment property<\/a> appeared first on MLC Contemporary<\/a>.<\/p>\n<\/div>\nWhy four and not five?<\/h3>\n
Final tips<\/h3>\n
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