Let me let you in on a little secret! For generations, smart investors have understood how to access the equity in their home or investment properties to continue accumulating more property and creating more wealth.
When you see people who continue to buy multiple investment properties and grow a substantial property portfolio, it is more than likely this is how they are doing it. Assuming you have the cashflow to service the debt and you have a sufficient amount of equity in your existing property or properties, you can borrow against this equity and use the cash as a deposit for your next property.
Rinse and repeat a handful of times throughout your working life and you can see the magic happen right before your eyes!
So how does it work?
Let’s say that five years ago you took out a $400,000 home loan to purchase a $500,000 property. This represents a loan to value ratio of 80% and at this stage, there is no opportunity to use equity to purchase further investment properties.
Fast forward to today and thanks to a well performing property market, your first property has increased in value to $800,000 and your loan has remained the same at $400,000. Your original loan now represents a loan to value ratio of 50% and since you can access equity up to 80% of the value of the property, you now have $240,000 of fully useable equity available for you to access.
At this stage, we can arrange a refinance and equity release to pull $240,000 cash out of your property to be used as a deposit for property two and three.
We can now go to the bank with cash in hand and submit an application for a $400,000 investment home loan pre-approval. Combine this with a $120,000 cash deposit (that you recently got from your equity release!) and you now are in a position to buy a $500,000 investment property, with $20,000 left over for stamp duty and other costs. Rinse and repeat this step with the other $120,000 from your equity release and secure property number three!
Is it difficult?
No! Assuming that you have the equity available in your property and have the household income to support the additional borrowing, it is relatively straightforward to access equity in your current property to buy more properties. A talented mortgage broker will ensure all stages of the process are smooth and stress free.
How long does it take?
Typically it takes 4 to 6 weeks to refinance your home loan and secure a pre-approval for your next investment property. From there, it will typically take another 2 to 6 weeks to find a suitable investment property. Once you have exchanged on an investment grade property, we would expect it settle within 6 weeks.
So, you could go from one property to two properties in 12 to 18 weeks, and from two properties to three properties in 8 to 12 weeks from there.
How much does it cost?
When it comes to finance, your mortgage broker will be paid a commission from the banks, so no cost there.
When it comes to accumulating investment property, there are some transaction costs you should expect. I like to factor in 5% of the value of the property for stamp duty, legal fees and such.
Further to that, I strongly advocate the use of property investment advisers, someone who is on the ground, helping you source investment grade property and negotiate with the selling agents to get you the best deal. For a good property investment adviser you should expect to pay circa 2% of the value of the property.
So what’s the catch?
It all sounds pretty good. Accumulating an entire investment property portfolio off the back of your existing property.
There is a couple of caveats. Number one, you have to have the equity available in your existing property to access. No equity, means no deal. Number two, you have to have the household cashflow to service the additional levels of debt. When you are borrowing the entire purchase price of a property plus costs, it is very likely that investment will be negatively geared for a couple of years. You want to make sure that you have the surplus cashflow in your household budget to absorb that negative gearing. Number three, you have to be in a position to secure further lending from the banks. Assuming you have the equity and the cashflow, this normally takes care of itself.
Other than that, it really is quite a simple, sustainable and scalable wealth creation strategy.