All Topics / Help Needed! / More equity questions

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  • Profile photo of FrugalOneFrugalOne
    Member
    @frugalone
    Join Date: 2010
    Post Count: 16

    Ok, I just want to get a bit of a clearer idea of the use of equity and exactly how it is used…

    I understand that if I have a property valued at say $200000, and I owe $100000, that I have $100000 equity. I can then borrow more funds using some of this equity as a deposit, up to a maximum of 90% i.e. $90000. Let's say I see a second property I would like to purchase for $300000. I have $90000 equity and wish to use $30000 of this – meaning 10% of $300000.

    Am I correct in my understanding that the loan (give or take other expenses) for the second property will be $270000?

    The lender has "ownership" of $30000 of the funds in the first property?

    Is it always the case even after say 10 years that there is still only $30000 of funds in the first property owing to the lender?
    I take it that when the first property is sold, at that point the lender gets their $30000 back? Is it $30000, or is it more (because for example interest has been charged)?

    Can I use equity in the second property, that was made using equity in the first property to get a third property? For example, $200000 property owing $100000, use $60000 of this equity to get into a second property at $300000. One day after getting the second property can I use say $15000 of the available $30000 equity in the second property to get into the third property? As long as there is enough equity, and loans can be repayed, is there a limit to how many properties can be gained this way?

    That'll do for now :D

    Profile photo of Greg ReidGreg Reid
    Member
    @greg-reid
    Join Date: 2008
    Post Count: 91

    In essence you are correct. You still need to qualify for the new loans being able to show sufficient income.
    In your example, although you have a $100k equity, you will not be able to access all of that, you could refinance that first property to perhaps an 80% or some lenders may go to 90% lend, meaning you may be able to set up a separate loan facility of $60k or so (taking to $160k overall at an 80% LVR).
    That second loan is still secured against your first property.

    You can use some of that $60k to fund the deposit and costs (stamp duty) to purchase another property and borrow the rest from another lender. For a $300k property, you may need a minimum of $45k to do this (depending on which state and the stamp duty costs). You then borrow $270k at a 90% lend (ignoring lenders mortgage costs).

    As long as you have sufficient available equity and able to qualify to borrow (based on income and debt levels) you could buy a 3rd property, again using a third lender.

    My view is as a general rule, you need about $120k available equity for each median priced investment property you purchase. This allows for about $80k to $90k deposit and costs and leaves a $30k safety net and the ability to debt recycle.

    If you sell the first property, you need to pay back the loans secured against that property, in your case, the $100k originally and whatever is owing  from the second loan you established.
    If you sell the second property, all you need to pay is the loan secured against that property, presuming from the second lender.
    I hope this helps.
    Good luck
    Greg

    Profile photo of FrugalOneFrugalOne
    Member
    @frugalone
    Join Date: 2010
    Post Count: 16

    Thanks for the reply Greg. Can I take the questions up a notch? :D

    Considering your response, I have considered the following property aquisition strategy and would like to know if it would work how I'm thinking it might. It is different to my previous questions, and mainly aimed at "owning" property for little outlay except for completely paying out/owning the first property. Basically it involves using a very large/all of the available equity in one property to build from, and not being in any debt.

    Let's say I own a $300000 property outright. I see a second property valued at $200000 that I would like to purchase. $200000 being well under the 90% or even 80% of using available equity in a $300000 property, can I purchase the second property entirely using $200000 of equity in the first property? There will be no loan, because I haven't borrowed any funds? If so, can I do that with a third property? Say I wish to purchase the third property valued at $100000, and I now "own" the second property valued at $200000. Given that $100000 is well and truly within the 90% or even 80% of the $200000 equity in the second property, can I purchase the third property entirely using the available equity in the second property, and hence have no debt attached to the third property?

    And in owning the three properties, there are no debts at all? The rent income from the three is not needed to service any debts?

    Sounds a bit to good to be true, so that's why I'm asking :D

    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Join Date: 2003
    Post Count: 12,024

    Frugal One

    No not too good to be true at all.

    In fact as long as you have the equity and serviceability you could use property 1 as security for all loans as long as the lvr is less than 80 -90%.

    Whether you would or not is a different matter.

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
    Email Me

    100% Investment Finance now available on selected properties. Email us for further information.

    Profile photo of ducksterduckster
    Participant
    @duckster
    Join Date: 2004
    Post Count: 1,674
    FrugalOne wrote:
    Ok, I just want to get a bit of a clearer idea of the use of equity and exactly how it is used…

    I understand that if I have a property valued at say $200000, and I owe $100000, that I have $100000 equity. I can then borrow more funds using some of this equity as a deposit, up to a maximum of 90% i.e. $90000.

    90% of $200,000 value = 180,000 so that is $80,000
    if you can get 90% LVR

    FrugalOne wrote:
    Let's say I see a second property I would like to purchase for $300000. I have $80000 equity and wish to use $30000 of this – meaning 10% of $300000.

    if bank lender does not need evidence of savings for the loan

    FrugalOne wrote:
    Am I correct in my understanding that the loan (give or take other expenses) for the second property will be $270000?

    Stamp duty is a considerable expense $9000 – $15,000 (depends on your state) plus mortgage insurance. $4000
    http://www.echoice.com.au/mortgage/home_loans?pn=/info/home_loan_calculators/stamp_duty.html
    http://www.mortgagebuddy.com.au/flash/LoanInsuranceCalculator.htm

    FrugalOne wrote:
    The lender has "ownership" of $30000 of the funds in the first property?

    No you now owe $100,000 mortgage plus another $30,000 as a line of credit loan against the security of the first property

    FrugalOne wrote:
    Is it always the case even after say 10 years that there is still only $30000 of funds in the first property owing to the lender?
    I take it that when the first property is sold, at that point the lender gets their $30000 back? Is it $30000, or is it more (because for example interest has been charged)?

    Depends on if you make repayments off LOC principal or not and if you pay off the interest charges each month.
    Depends on if you make repayments off Mortgage principal or not and if you pay off the interest charges each month.

    FrugalOne wrote:
    Can I use equity in the second property,

    No
    and
    Yes
    If you can increase the property value of the second property
    as 30,000 is being used as a deposit so LVR is 90% at value of $200,000

    FrugalOne wrote:
     that was made using equity in the first property to get a third property? For example, $200000 property owing $100000, use $60000 of this equity to get into a second property at $300000. One day after getting the second property can I use say $15000 of the available $30000 equity in the second property to get into the third property? As long as there is enough equity, and loans can be repayed, is there a limit to how many properties can be gained this way?

    You could use the spare $30,000 in LOC that has not been borrowed against property one for deposit in third property.

    As time passes Equity will increase or you may be able to add value (Renovation) and you could access the increased equity as a further LOC loan.

    If you keep doing this eventually around the 1 million mark of debt you reach a ceiling of borrowing due to mortgage insurers limit.
    That'll do for now :D[/quote]

    Profile photo of FrugalOneFrugalOne
    Member
    @frugalone
    Join Date: 2010
    Post Count: 16
    Qlds007 wrote:
    In fact as long as you have the equity and serviceability you could use property 1 as security for all loans as long as the lvr is less than 80 -90%.

    And there would be no loans at all, as you "own" all the properties?

    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Join Date: 2003
    Post Count: 12,024

    Yes there would be but they would secured against other properties.

    You would still be 100% geared.

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
    Email Me

    100% Investment Finance now available on selected properties. Email us for further information.

    Profile photo of FrugalOneFrugalOne
    Member
    @frugalone
    Join Date: 2010
    Post Count: 16
    Qlds007 wrote:
    Yes there would be but they would secured against other properties.

    You would still be 100% geared.

    There is something that I am missing here. The strategy that I propose won't use any debt – at least that's what I'm asking – is it possible? If you have a pile of equity how much of it can you use to "purchase" another property? My strategy involves using as much equity as possible to avoid lending.

    Profile photo of Greg ReidGreg Reid
    Member
    @greg-reid
    Join Date: 2008
    Post Count: 91

    ,FrugalOne,
    It may be a different interpretation in the use of the terms equity and debt here. It is debt you are using as Richard said,  it is 100% debt as you are borrowing the funds to be able to purchase the respective properties.
    In each case you are borrowing these funds secured against existing properties. The strategy you are outlining is 100% + debt funded and you will be paying interest on these loans.
    Greg

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