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  • Profile photo of brmiaubrmiau
    Participant
    @brmiau
    Join Date: 2011
    Post Count: 24

    Hi all,

    I'm after some info on using equity to buy an investment property. Here's the figures…

    We owe $253,000 on our mortgage. Our house is worth $420,000. I know that means we have $170,000 worth of equity. How does that help us buy an investment property?

    If we are looking at a property worth $350,000, does that mean we can use some of the $170,000 as a deposit? So if we used $70,000 of the equity in our home our loan for the investment would be $290,000? The rent return a week would be $300 and the interest would be $430 a week. We pay $130 a week plus all other expenses. How much would we get back in tax at the end of the year?

    Basically can someone put it all in basic terms for me with those figures. I'm new at this and want to learn

    Thanks, Brad

    Profile photo of Jamie MooreJamie Moore
    Participant
    @jamie-m
    Join Date: 2010
    Post Count: 5,069

    Hi Brad

    There's usable equity and actual equity.

    Your actual equity is $167k – which is simply the value of your property minus the loan amount.

    The useable equity is what the bank will let you access.

    Most banks will allow you to take your loan up to 80% of the properties value.

    In this instance, you'd be able to access $83k which would be used to cover the deposit/costs on your purchase.

    Some banks will allow you access equity up to 90% of the properties value – which means you can access more but some LMI would payable. 

    Make sure you set up the equity loan as a separate loan account and keep both your PPOR and IP loans uncrossed (banks love to cross collaterise – and many clueless brokers do too).

    Hope that helps.

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
    Email Me | Phone Me

    Mortgage Broker assisting clients Australia wide Email: [email protected]

    Profile photo of Josh AthertonJosh Atherton
    Member
    @josh-atherton
    Join Date: 2011
    Post Count: 269

    Hi Brad, 

    Jamie has the equity scenario down pat for you, so I would like to comment on your strategy. 

    1. Interest: Your calculation seems a little high, you could would not be paying that much. However allowances/considerations for increases is advised as rates are quite low at the moment. 

    2. Return: Your gross return is not even 4.5%. that is very low and could severely retard you should you wish to build a portfolio in time. Many investors only buy 1 investment property, this is quite often due to getting into bad negative gearing situations. 

    3. Capital Growth: Without knowing the area, I would strongly suggest that you do some very thorough research into the area to ensure that very good capital growth will occur both in the short and medium term due to your cash flow. 

    What are you trying to get out of investing in property? ie your ultimate goal etc?

    Josh

    Profile photo of brmiaubrmiau
    Participant
    @brmiau
    Join Date: 2011
    Post Count: 24

    Jamie, so does that mean if I purchased an IP for $350k my loan would be the purchase price minus my available equity? Therefor the loan would be $267k for the IP?

    Josh, I'd like to be able to buy investment properties and eventually have 5,6,7,10 etc… I know that might not be too realistic but I would like to hold on to them and have lots of capital growth.

    How much would I be able to borrow for my first IP? My wage is $95k a year and I have $83k of available equity.

    Thanks, Brad

    Profile photo of Jamie MooreJamie Moore
    Participant
    @jamie-m
    Join Date: 2010
    Post Count: 5,069
    brmiau wrote:

    Jamie, so does that mean if I purchased an IP for $350k my loan would be the purchase price minus my available equity? Therefor the loan would be $267k for the IP?

    The equity that you access will be spread over the deposit and costs on the IP.

    So let's assume that the costs associated with the purchase are 5% of the purchase price – so you allocate $17.5k to purchase costs (such as stamp duty, legal fees). That leaves you with about $65k to cover the deposit meaning a loan of $285k would be required for the IP loan.

    I can't comment on your borrowing capacity without knowing the finer details of your situation.

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
    Email Me | Phone Me

    Mortgage Broker assisting clients Australia wide Email: [email protected]

    Profile photo of Josh AthertonJosh Atherton
    Member
    @josh-atherton
    Join Date: 2011
    Post Count: 269

    Hi Brad, 

    The available equity can be used as you wish (well, within reason obviously). How much of your equity you use as your deposit is up to you and will depend on your desire to pay LMI (loan mortgage insurance). A 10% deposit towards your new property could be achievable so you may only need $35,000 plus purchasing costs (stamp duty, legal fees, inspections, and LMI). LMI would be high at this LVR. 

    If you contributed a 20% deposit, $70,000, you avoid LMI however you still have other purchase costs including Stamp duty etc. So you wont have much of your useable equity left. 

    Your loan ON the investment property would be the purchase price minus your cash contribution from your equity. The remainder of the loan is against your current house. Which Jamie has already outlined above. 

    In relation to your growth strategy, if that is your goal to accumulate multiple properties you will need to create a very good property investment plan and work out where your strengths and weaknesses are. I would not be recommending you purchase negatively geared property if you want to grow a portfolio. If you want to own 5 properties in the next few years lets say, could you afford for each one to be costing you $5000 per year to hold? This would be putting you out of pocket by $25,000 per year. Sure, hopefully capital growth will recoup this back for you, however you need to be able to hold your assets to allow capital growth to work. 

    Hope this helps

    Profile photo of brmiaubrmiau
    Participant
    @brmiau
    Join Date: 2011
    Post Count: 24

    Thanks Jamie that's what I thought but someone who is meant to be in the know was telling me otherwise.

    I could afford $25k a year but it would be a stretch given my wife is on maternity leave and will ve going back to work 2 days a week next year. Can definitely afford $5 to $15k a year. We currently pay $1k a week toward our mortgage. 

    I think we will see our bank (westpac) to find out exactly how much we can borrow for an IP and go from there.

    Thanks again

    Profile photo of Jamie MooreJamie Moore
    Participant
    @jamie-m
    Join Date: 2010
    Post Count: 5,069

    No worries.

    Just remember that Westpac is only one lender – so can only advise based on their own borrowing capacity calculator and cashout policies. Different lenders have different ways of determining your borrowing capacity – and there's quite a few that are better than Westpac in this regard.

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
    Email Me | Phone Me

    Mortgage Broker assisting clients Australia wide Email: [email protected]

    Profile photo of Josh AthertonJosh Atherton
    Member
    @josh-atherton
    Join Date: 2011
    Post Count: 269

    Hi Brad, 

    for all of our clients we strongly recommend using a mortgage broker when looking to borrow to invest. More than often a bank lender does not understand investing or understand what you're trying to achieve. Your property investing team must be on the same page as you and get all the numbers!

    Sorry for the push Jamie, but Brad, even contact Jamie. Brokers don't need to be in your area to service your needs, technology makes it easy now!

    As for being negatively geared, even if you can afford it, why? Theres suburbs which can provide good capital growth and yields.

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