If you’re looking to start building an investment portfolio, using the equity you have built up in your home can be a good way to do so.  Even better, if you built enough equity you won’t have to save for a hefty deposit. In some situations, you can invest without having to find any additional cash.

If you’re ready to start, the first step is to understand how much you need for a deposit. Then, you can decide whether you could use cash or just equity to fund the purchase. 

Calculating the deposit

When buying an existing investment property for rental, you generally need a 30% deposit, which is usually higher than the deposit needed for a home you live in. The type of property you plan to buy affects how much you need for a deposit, so do your homework and check with potential lenders on industry and regulator requirements.

What is equity?

Equity is the difference between what your property is worth according to the market and the bank’s valuations and your outstanding mortgage balance. If your home’s value has increased since you bought it, you might have enough equity to use as a deposit without needing any additional cash. This could especially be the case if you have paid off a good chunk of the mortgage.

If you don’t have enough equity, you might be able to use savings, cash gifts and loan guarantees from relatives to build up your deposit. If you own more than one property, you might also be able to combine equity across them, provided you meet the lending requirements set by your bank or lender. For example, if you have $300,000 of equity in your primary property and $100,000 equity in a rental property, your total equity would be $400,000.

Be aware of the risks

Using loan equity can be a useful way to buy an investment property, but there are risks you should be aware of:

• It can provide greater financial flexibility by allowing you to keep your cash savings intact. However, you need to be comfortable with the potential for market conditions to change and the need to manage the additional debt if property values drop. Additionally, you must be able to make additional payments if interest rates increase.
• It’s important to plan for more than just the deposit and mortgage repayments. Owning an investment property also comes with other ongoing costs such as maintenance, insurance, council rates, and other expenses.
• Also ask yourself: Could you top-up the repayments on your investment property if the rent isn’t enough? Could you cover the costs if your property is vacant for a period, or if unexpected costly repairs are needed?

At the end of the day, using home equity to purchase a quality, well-located investment property can be a promising opportunity to explore with a qualified accountant or licensed financial planner.

Whether you want to buy, sell or rent a property, don’t hesitate to contact your local Raine & Horne office.