Easier said than done right?
Well, if you are smart enough, and I am sure you are, you can build a sizable property portfolio by using the equity on your current home to cover the down-payment on a new property.
Let’s back up a bit and consider what equity is:
The equity in your home, is the difference between the amount you owe to the bank and the current market value of your property. For example, if you have a $500,000 apartment and you owe $250,000 on it, your equity is $250,000. However, the portion you can use will be smaller than $250,000 because the bank will not lend you 100% unless you have other assets to offer as security.
The best way to know the market value of your home is to contract a qualified valuer to assess your property value. Another option would be to get an RPdata report on the estimated value of your home. You usually have to pay for these but if you contact firstname.lastname@example.org with your property address, we can provide you with as many complimentary property reports as you like.
Once you have an idea of the value of your property, we can help you access as much as 90% of the market value of the property, minus what you already owe on it. However, if you go over the 80% threshold you may be liable for LMI or lenders mortgage insurance (this is an insurance that covers the lender in case of default).
So let’s say we only want to borrow up to 80% of the Market Value of the property. If our home is worth $500K and we owe $250K, we can borrow another $150k for a total of $400k in borrowed funds, or 80%.
This means we can use $150k as a deposit including other purchasing costs like stamp duty, pest and building inspections, conveyancing fees, and other associated costs which are normally around 5% of the purchase price.
If we buy another $500k property, and we use $125K as a deposit, we would get a loan for $375K. The other 25K being for the purchase costs mentioned above (please note that fees can change depending on where you live and the providers you chose)
Provided your particular circumstances allow you to afford payments on a total lend of $775K ($400K+$375K) you will now be the owner of a 1 million dollar property portfolio and will be potentially exposed to double the growth in capital gains. This means that if your properties go up by 20% over a few years, you will gain $200K instead of $100K with just one property.
Please note that this is a simplified calculation which does not take into consideration rental income or mortgage repayments as you will need to assess this on a case by case basis. It is recommended that you seek independent financial and tax advice before making an investment decision.
Do not hesitate to contact me if you have any questions. And as always, our best discussions happen in the comments section below.
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With a grateful heart,