Buying investment properties has long been a strategy that many Australians have used to build their long-term wealth. The Australian property market has experienced strong price growth over the past three decades.
Investment properties also provide their owners with rental income. This income can be used to finance a portfolio of multiple properties over time, along with the equity that you build up in each property.
Investment properties also provide you with tax benefits because you can deduct eligible expenses from your total income (including your rental property income). Expenses also incurred for managing or repairing an investment property can be added to an investment loan. Not only are the initial expenses tax deductible, but also the borrowings. This may be preferential in the instance that an investment property owner still has a debt on their primary residence. If you are taking cash from an offset account for an expense related to the investment, then you could also increase the investment loan to repay your offset account and move the interest expense to the investment.
Buying another property using the equity in your investment
Once you have built up sufficient equity in your investment property, you can repeat the process to build your property portfolio.
Example:
Continuing with the earlier example, suppose you used 80% of the equity you had in your home (i.e., $360,000) and borrowed an additional $340,000 to purchase an investment property worth $700,000. Your total debt level is $700,000.
In two years, your home may be worth $900,000 if market prices continue to increase, and your investment property may be worth $800,000, for a total capital growth over the two years of $200,000.
Over that same period, your overall debt level will have decreased due to your loan repayments. If it has decreased by $30,000, then you will have an additional $230,000 worth of equity that you can use as a deposit on another investment property.
However, it is important to understand that property market prices can fall as well as rise in the short term. Property is best viewed as a long-term investment. It is worthwhile to get independent professional advice to help you build your wealth via property.
Using your home to buy your first investment
Once you have built up sufficient equity (ownership) in your home, you can use that equity to help finance an investment property purchase. Your equity can be used as your deposit. Your equity is the difference between the market value of your home and how much you owe on your home loan.
Example:
If your home is worth $800,000 and you owe $350,000 on your mortgage, then you have $450,000 in equity. Many home owners have significantly increased equity levels in their homes due to the property price boom that has occurred across most parts of Australia over the past few years.
Lenders will typically lend up to 80% of the value of an investment property without requiring you to take out lenders’ mortgage insurance. You should therefore aim to use the equity in your home to fund at least 20% of your investment property’s purchase price to avoid this cost when possible.
Lenders will typically be prepared to lend up to 80% of the equity you have in your home. In the above example, such lenders would be prepared to lend up to $290,000 (i.e., 80% of the property value minus the $350,000 that has already been borrowed). The investment property purchaser would need to borrow the remainder of the investment property’s purchase price.
It is important to understand that using your equity in your home for your investment property deposit will increase your home loan debt. However, you can use the rental income that your investment property generates to help you cover both your home and investment property loan repayments.
Discover how much equity you have available
If you would like to discover how much equity in your existing property that you can use, please speak to our Lending and Finance advisor. We can also help you obtain a pre-approval to give you better comfort if you are looking at purchasing a property and want to know how much you can borrow. You should always take caution with pre-approvals and we can discuss this further with you.
This content has been prepared by Wilson Pateras to further our commitment to proactive services and advice for our clients, by providing current information and events. Any advice is of a general nature only and does not take into account your personal objectives or financial situation. Before making any decision, you should consider your particular circumstances and whether the information is suitable to your needs including by seeking professional advice. You should also read any relevant disclosure documents. Whilst every effort has been made to verify the accuracy of this information, Wilson Pateras, its officers, employees and agents disclaim all liability, to the extent permissible by law, for any error, inaccuracy in, or omission from, the information contained above including any loss or damage suffered by any person directly or indirectly through relying on this information. Liability limited by a scheme approved under Professional Standards Legislation.
