“Equity, Mate!”
Have you ever wondered how you get the deposit for your first investment property?
Or your second and third for that matter.
The answer is … equity mate!
(Credit for that goes to the Commonwealth Bank ad campaign from a few years ago. Remember it?).
You see, while most of us save up the cash for a deposit on our first house, you don’t need to for your next ones.
What you do is, you tap into the equity you’ve built up.
This is how investors grow their portfolios quicker without saving a deposit.
So, what exactly is equity?
Equity is simply the value you build up in your house as its value goes up, and as your loan balance goes down.
Let’s say your house is worth $800,000 and you have a $500,000 loan against it.
Your equity in this case is $300,000.
It’s simply the difference between what it’s worth and what you owe.
Now, the beauty of equity is you can use it to acquire another property.
Let me show you how.
Typically you can borrow up to 90% of the value of your home.
This would be 90% of $800,000 which is $720,000.
Since you already have a $500,000 loan, and you can borrow $720,000 in total, you can get a new additional loan for $220,000.
Let me run this by you again because it’s how investors go from 2 to 3 to 4 properties without having to save a deposit.
Your house is worth $800,000.
You can borrow up to 90% of its value which is $720,000.
You already owe $500,000 so you can get an extra loan for $220,000.
And you can use this $220,000 as a deposit for another investment property or two.
See?
It’s simple once you know how.
In fact, in some cases you don’t even have to save up a deposit.
Does This Help You Avoid A Deposit Altogether?
For your first property, you need a deposit of some sort.
However, it doesn’t necessarily need to be cash in the bank.
One of our clients is Charlotte, who came to us as 26 year old single mum.
She wanted to set herself up financially, but didn’t have a deposit saved up.
Lucky for Charlotte, she used the equity in her parents’ home which got her investing journey underway.
(I’m sure you’ve heard the saying – Bank Of Mum And Dad – that’s what this is).
It got her into a $450,000 investment property in Moreton Bay, and in 2 years it went up $120,000.
She then used this equity to secure her third and in less than 4 years her net worth has increased by $450,000.
And it was all because of … equity mate!
The best part is that Charlotte now has three properties all going up in value faster.
Of course, not everyone can tap into the bank of Mum and Dad. Still, you can see what’s possible once you get your foothold into the market.
And the beauty of property investing is, the more high quality properties you have, the sooner your equity builds and the sooner you can invest again.
This is the ‘snowball effect’ of real estate investing.
Warning: Do Not Make This Mistake When You Have Equity
As you can see, equity is a powerful weapon.
But like most weapons, it can be dangerous if you don’t use it the right way.
One of the biggest risks with equity is using it for what’s known as bad debt.
Bad debt is borrowing money to buy things which don’t produce income or go up in value.
I’m talking about holidays, boats, a new car, things like that.
Used correctly, equity can help you grow a property portfolio.
But if you just use it for lifestyle purchases, you can quickly run up very high loans with higher repayments, and not have anything to show for it.
On the other hand, in a fast growing real estate market you can quickly accumulate equity, and use it to expand your portfolio sooner.
When you want to know how, you can join our free online Masterclass series and discover how to outperform the market, and create wealth sooner from real estate.
It’s free, and you can watch it by clicking here.
Alternatively, if you’re looking for more tailored advice on how these factors will affect your financial position and how you can capitalise on the current property market – you can book a free consultation by filling out the form below.