Leveraging Equity to Invest in Property

Investing in property is a popular way to build wealth and secure financial stability. One of the most powerful tools in the world of property investment is equity. Equity acts as leverage, allowing investors to access larger sums of capital to purchase investment properties without having to put up all the money themselves.

Without leverage, the size and number of properties one can invest in might be limited by your savings. Equity allows one to overcome this hurdle, and invest in properties that could generate higher returns or offer better long-term value.

Understanding Equity

Equity refers to the difference between the current market value of a property and any outstanding mortgage or debt owed on that property. Simply put, it is the portion of the property that one actually owns. By leveraging equity, investors can access larger sums of capital to invest in additional properties, thereby increasing their investment portfolio and potential returns.

Calculating usable Equity and Borrowing

To determine the amount of usable equity available for investment, one must calculate the difference between the property’s market value and the outstanding mortgage. Lenders typically allow borrowers to access up to 80% of their total equity, with some institutions offering higher limits with Lenders Mortgage Insurance (LMI) coverage.

How much can one borrow?

To calculate how much one can borrow for their investment, simply multiply the disposable income by four. For example, $400,000 can be borrowed using $100,000 of available funds to pay 20% deposits and 5% debt support.

What is usable equity?

As the name suggests, usable equity is the equity in a household that can actually be owned and borrowed against. One can work out their available disposable income by calculating the current value of their assets against what one still owes on the mortgage.

For example, if the house is worth $400,000 and the person owes $100,000 on the mortgage, this equation could be a disposable income:

$400,000 x 0.8 = $320,000
reducing existing loans by $100,000
Thus, the operating budget would be $220,000

Steps to use Equity to Invest in Property

  1. Assessing the current equity
    The first step is to determine the amount of equity you have in the existing property. This can be done by subtracting the outstanding mortgage or debt from the current market value of the property.
  1. Calculating the loan-to-value (LTV) ratio
    The LTV ratio is the percentage of the property value that is being financed by the lender. Lenders use this ratio to assess the risk associated with the loan. A lower LTV ratio indicates less risk for the lender, which can increase the chances of securing a loan.
  2. Applying for a loan
    Once the LTV ratio has been calculated, one can apply for a loan using equity as collateral. Lenders will consider factors such as income, credit history, and the LTV ratio when assessing the loan application.
  3. Purchasing an investment property
    With the additional capital from the equity loan, one can now invest in a new property. It is essential to conduct thorough research and due diligence to ensure that the property aligns with the investment goals and risk tolerance.
  4. Managing the Investment
    Once the investment property has been purchased, it is crucial to manage it effectively to maximise returns. This may involve finding tenants, maintaining the property, and monitoring market trends to make informed decisions about future investments.

Benefits of using Equity to Invest in Property

  1. Increased purchasing power
    Leveraging equity allows investors to access larger sums of capital, enabling them to purchase properties that may have been otherwise out of reach.
  1. Diversification
    Investing in multiple properties can help diversify an investment portfolio, reducing risk and increasing potential returns.
  1. Long-term wealth creation
    Property investment can provide a steady stream of passive income and potential capital gains, contributing to long-term wealth creation.

Conclusion

Leverage equity can be a powerful tool for property investors, granting them access to greater capital for acquiring investment properties. This strategy has the potential to boost returns and accelerate wealth building. However, it’s crucial to recognize that leveraging equity involves debt and carries inherent risks.

Careful consideration should be given to an investor’s financial situation, risk tolerance, and the current state of the property market.  It’s essential to ensure the ability to manage the additional debt burden and potential fluctuations in rental income or property value. With thorough research, sound financial planning, and responsible management, leveraging equity can be a successful strategy for investors seeking to build a strong property investment portfolio.