Using equity to build your portfolio

Using equity to build a portfolio is one of the most powerful strategies real estate investors use to get ahead. It allows you to grow your investments without having to save every dollar yourself.

The first property is usually one of the most critical as you can use its growth, and any money you’ve poured into paying the mortgage off sooner, to give you a leg up into your second property.

Effectively, pulling the growth in value from your first property allows you to buy the second investment with no money down in terms of cash savings.

The four steps behind this strategy.

  • Grow equity in your current investment property or your home

Consider paying it down quickly, buying at a lower than market price, renovating, developing, waiting on the market to increase or a combination.

  • Get a valuation on your property

This can be organised through your broker or lender, however you can also check informally through your own online comparisons and real estate agent appraisals).

  • Calculate how much of the equity you need to withdraw

Aim to keep it to 80% or under to ensure you do not need to pay Lender’s Mortgage Insurance).The equity can also be used in conjunction with any additional savings you are willing to put down. Be aware that if you have a mortgage on your home you would be better to use your savings to lower that mortgage and then extract equity to invest in another property. This is because your home loan is not tax deductible and therefore more expensive to service than an investment loan.

  • Speak to your broker to organise a release of the equity.

As you continue to grow your portfolio, you can undertake this same process multiple times. You don’t have to pull equity just from one property either. A 5% growth in the market across a portfolio of five properties gives you much more equity to use than 10 per cent growth in one property.

Building your portfolio, with market movements in mind, will allow you to acquire more properties, sooner.

One property: How it’s done by the numbers

Let’s say you already have a property – a house – that is worth $800,000. You want to buy an investment unit worth $300,000.

If you already have the costs covered, all you’re looking to do is dip into the equity in the house to cover the deposit on the unit.

Say you currently owe $400,000 on the house. This leaves you another $400,000 worth of equity left over. You need to keep $160,000 in the house to avoid triggering LMI, so this brings the amount you can take out down to $240,000.

The unit deposit, at 20%, is $60,000.The bank will then loan you an additional $240,000 to buy the property.

You could use the rest of the money available as equity to renovate properties in your portfolio, buy others or keep as a buffer. If you didn’t have the costs, as assumed, you could use this additional equity to cover these expenses (such as stamp duty and solicitor’s fees).

Top tips to get ahead

  • You should be speaking with a mortgage broker who specialises in multiple-property portfolio investors, as the structure of your loans will matter when you want to use your equity.
  • Ensure you understand your numbers. Ask a professional to help you if you are not sure of your cash flow.
  • You still need to be serviceable for the mortgages, so do some risk-analysis ahead of time. Consider whether or not you can pay back the loan should you face a period of rental vacancy, or if interest rates rise.
  • If you do choose to borrow more than 80% of your equity, and your lender allows it, ask about the costs of LMI in the long-term. Also, be aware that over 80% it will be difficult to find an interest only loan.

We would be more than happy to discuss your options if you need help with any of the above points. Click here to contact us or call 1300 266 350.