Using Equity In Your PPOR As A Deposit

This is the only way we've ever done it with our IP's.

It'll get you into IP sooner than saving for a cash deposit, but the only problem with it is you will be using 100% or more borrowings to fund the purchase.

This will probably make the cashflow negative, and moreso than if you injected cash for the deposit.

If you can support the neg cashflow this is ok, but the neg cashflow will have a drain on your servicability for the next one. In other words, you may need to wait longer to buy the next one than if you had injected cash as a deposit, and created a pos cashflow with which to decrease debt and improve both the equity and the cashflow/servicability.

The other "con" is that you have no equity with 100% loans, and if somethinbg goes wrong at the start and you need to sell, you may have to sell at a significant loss.

So, do it – but make sure you are in a position to be able to minimise debt quickly and get the LVR down to increase your safety margin.

Hi Gezzy

You can absolutely use equity in your PPOR to buy an IP. The main benefit of doing this is that you get to enter the market sooner (and cheaper, if the market is rising). Experienced investors will tell you that you make your money when you buy an invesment property, rather than when you sell. That means it is imperative to buy wisely and get the best possible property for your budget. To ensure you make the most of your money and buy quality property, its worth considering using a licensed buyers agent. Check out websites of buyers agents in your area.

Yvette Goulter
Principal, RedRoof – Licensed Buyers Agents, Brisbane.
http://www.redroof.com.au

It doesn't matter what the price of the IP is, it is either bought with cash and borrowings, or just borrowings, or just cash if you have enough.

If it was valued at $200k and you could buy it for 80% of it's value, then yes, you would have some equity.

Hi Gezzy

Best to explain with an example.

you have a $100,000 home loan
$20,000 cash
and wish to buy a $100,000 IP.

what would you do?

most would use the $20,000 for the IP as deposit, so end result is
$100,000 home loan = non deductible interest
$80,000 IP loan = deductible interest

But I would do this
$20,000 deposited into the home loan
$20,000 borrowed from the home loan
$80,000 borrowed for the IP
=
$80,000 home loan
$20,000 + $80,000 investment loan = $100,000 IP loan

You would have the same net loans, but increased your deductible interest.

Of course you will need to set the loans up properly, best to have a split on the home loan so the $20,000 is separate. Also best to have all loans IO with a 100% offset account.

Whilst i appreciate X collateralising may work for some people for most it is more trouble than it is worth for most investors.

I guess like anything it is never a problem until it is a problem and then it is a real issue going forward.

There are many different strategies used by different people.  One of the advantages of 20% deposit is reduced lending costs.  One of Steve's main aim's is finding CF+ properties, this is easier when borrowing smaller amounts. 

Another strategy is to borrow the maximum amounts possible (nowadays still a cpl of lenders around the 93-95% LVR) borrowing the maximum amounts is giving you a larger potential for capital growth.  This then enables accessing equity to fund future purchases.  As the process continues your maximum borrowing in individual properties is reduced.  If you have a PPOR and an IP its possible to get a 95%LVR on both depending on the security of the property, income, etc.  Down the track lenders wont like you having 30 properties all streched out to 95% LVR.  Here they acknowledge the additional cost of LMI but this is weighed up against the capital growth potential and future buying power of that additional capital growth.

This is why it is important to read up on many different strategies used by different people and then finding one that you are comfortable with.  Borrowing larger amounts carries higher risks, you must judge if this will be balanced out by higher gains.  Also some strategies work better in different climates.  Some strategies are harder to finance in the current climate.