Property Investment Tips
Leveraging
Leveraging the correct way to ensure you don't run out of equity ...
The biggest advantage from investing in property has got to be leverage! Not only from a return on investment perspective, but from a borrowing perspective too.
Most lenders will give lend you 80% of the value of a property. Which means in order for you to purchase a property, you have to come up with a 20% deposit. This can be in the form of cash savings, or equity in existing properties that you own.
What is the best way to utilise the equity that you have in your properties to continue purchasing, and never “run out of equity”?
Most lenders, and some mortgage brokers, will insist that the best way is to use the equity in the properties that you already own, and finance your next investment property purchase with the same bank.
Unfortunately they only have it half right! If you were to follow this advice you might be able to purchase the next property, but sooner or later you are going to run out of equity.
The best way to do it would be to still use the equity in the properties that you already own, but instead of financing the new property with your current bank, just setup a revolving credit to take your borrowings up to 80% of the value of your existing property (80% LVR).
Use the facility to put down a 20% deposit on the new investment property you are purchasing, and go to another bank to get an 80% loan to purchase the investment property. The new bank will have the mortgage on the new investment property.
Then, if you have purchased the investment property below valuation or you have added value to the property, increase your borrowings at the new bank back up to 80% of the value of the property (a registered valuation will be required at this stage).
Put the additional funds that you have raised from the new bank back into your revolving credit facility with your existing bank.
By doing this you can effectively continue using the initial revolving credit facility that you have set up to put 20% deposits on properties and the get the remaining 80% from other lenders.
This is a very effective way of ensuring that you never run out of equity.
Attached is a working example ...
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