The equity in your home could be the missing ingredient in purchasing your first investment property.
The idea of property investment is one that appeals to many Australians but is sadly often overlooked because of the misconception that it is only within the reach of the wealthy.
The reality is that with the right finance, planning and strategy, an investment property may be easier to achieve than you think.
Ease the deposit burden
One of the key challenges to breaking into property investment is raising a deposit, but there are solutions. Property buyers are typically required to contribute 20% of the property’s value, and for some this can be a stumbling block. But existing home owners may be able to unlock equity – or the increased value – that’s built up in their own home to cover some or even all of the down payment on an investment property.
The following scenario illustrates how.
Dan and Jessica bought their four bedroom family home in Doncaster in 2003 for $247,000 putting down a $49,400 deposit and taking out a loan for $197,600. The couple recently decided that they’d look at breaking into the investment market so they contacted us for help.
We suggested they get a valuation of their home, and they discovered that it was now estimated at $580,000.
Over the years Dan and Jessica had paid $48,000 off their original loan leaving $149,600 owing on the property. Today’s valuation of the property, less the outstanding loan, left them with $430,400 worth of equity.
Dan and Jessica didn’t want to sell down their managed funds to raise the deposit for the investment property, so we suggested they consider refinancing their own home to free up some equity. Once successful at auction, Dan and Jessica put down a 20 per cent deposit on a $350,000 two bedroom apartment and take out an 80 per cent loan.
The deposit came to $70,000 leaving a further $20,400 to cover stamp duty and other expenses while a $280,000 loan covered the rest of the purchase price. Now that Dan and Jessica had a bigger loan on their home their repayments had gone up, but they were pleased to discover that the repayments on their investment property were almost covered by the $385 weekly rental the investment property was generating.
And because the couple managed their investment themselves they reduced the overheads against the gross rent. By taking out an interest-only loan they also minimised their monthly outgoings and improved their cash flow.