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  1. #1
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    Default Using home equity

    If you home was worth $650,000 plus and you owed the bank $388,000 (initially borrowed $420,000) would you buy an investment property?
    I'm not too sure how equity works.
    I saw a 2 bedroom apartment in a sought out area (close to beach, shops, train station etc) for $599,000. Rent will be around $500 per week.
    What do you think?

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    Default Using home equity

    I don't think the equity matters. You should be asking if you can manage repayments.

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    You've really only got just over $200k equity. Some lenders will only lend you 80% of the total of equity.

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    We owe $600k on our house. It is worth at least $1.4 million (even more - most 4/5 bedroom houses around here sell for at least $1.6) but we can't get a loan for an investment property because I work part-time and my husband is self employed.

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    Buying an investment property is often more about cashflow than equity.

    Just because you have anough equity, doesnt mean you can afford to borrow more to buy an investment property.

    Work out how much you would need to borrow. Work out what the repayments would be on that - look at your income and assess whether or not you can afford it. And not just making the mimum repayments but paying down the loan.

    Remember that although you may get $500pw rental income - you have property management fees, maintenance, rates + taxes, strata fees + insurance - allow for vacancies and allow for rent to go down as well.

    You need to be able to afford to make the repayments if something goes wrong - if you are forced to sell you WILL lose money. If you can afford to keep up the repayments for a while, and sell when you are ready - and you buy well - then property can be a fantastic investment and leveraging using your own home can earn you a lot.

    But it all comes down to cash flow.

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    Quote Originally Posted by BH-KatiesMum View Post
    Remember that although you may get $500pw rental income - you have property management fees, maintenance, rates + taxes, strata fees + insurance - allow for vacancies and allow for rent to go down as well.
    All of this. Plus you also need cash on hand to cover unexpected emergencies. For example As a homeowner, if my oven of dishwasher died tomorrow and I didn't have the cash on hand, I would put up with it until I could afford a new one. If the oven or dishwasher dies in the rental, the tenants would expect a new one straight away - and rightly so - they are paying rent in the good faith that the property will be well maintained. Then depending on how long you hold onto the property for, there are long term maintenance costs to consider eg recarpeting, repainting, new kitchen / bathroom.

    You would also need to be prepared for the fact that the property could get trashed. Property Inspections, bond money and insurance will only give you so much protection and you may find yourself out of pocket at some stage.

    I agree with what everyone else has said, about it coming down to cash flow. In addition, potential for capital growth and how long you will hold onto the property are both important to consider. When we were still married, we (well my ex) bought an investment property. Purchased at the top of the market pre GFC. He sold a few years ago for not much more than he paid for it in the first place. He held onto the property for about 6 years, but I would say he made a capital loss overall on that property.
    Last edited by SSecret Squirrel; 26-03-2017 at 12:28.

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    Thanks all! Some really good info.

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    The way that equity works is basically the same as genuine savings. So you can use the equity in your home as a deposit on another property or to take out a loan.

    Property Value = ~$650K
    Loan amount = $388K
    Difference = ~$262K


    However, most banks will only allow you to borrow up to 80% of the property's value. Some may allow you to borrow up to 95%, but you will have to Lender's Mortgage Insurance, which can be in the tens of thousands of dollars (as an example, we paid $9K on a $280K loan). So you may only be able to utilise 20% of the property value as equity.

    Property Value = $650K
    20% of ppty val = $130K
    Difference ($262K) minus 20% of ppty val = $132K.

    You can then use this $132K equity as a deposit on another property. But again, it will need to be equal to at least 20% of the new property's value, to avoid lender's mortgage insurance.

    New ppty val = $599K
    Equity deposit ($132K) = 22% deposit
    Loan amount = $467K

    This would mean that you'd then be paying off the loan for your current house, plus the loan for the investment property.

    $388K + $467K = $855K.
    Payments at interest rate ~4% = ~$4K per month.
    Rental income = $2166pm
    Difference = $1834pm

    You would also need to take into account whether you wpuld pay tax on the rental income, rates, landlord insurance, real estate agent fees, etc. to see whether it would be financially viable for you.

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    What about (instead) if I want to borrow $12-15k to renovate my existing house?

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    Quote Originally Posted by Frankenmum View Post
    The way that equity works is basically the same as genuine savings. So you can use the equity in your home as a deposit on another property or to take out a loan.

    Property Value = ~$650K
    Loan amount = $388K
    Difference = ~$262K


    However, most banks will only allow you to borrow up to 80% of the property's value. Some may allow you to borrow up to 95%, but you will have to Lender's Mortgage Insurance, which can be in the tens of thousands of dollars (as an example, we paid $9K on a $280K loan). So you may only be able to utilise 20% of the property value as equity.

    Property Value = $650K
    20% of ppty val = $130K
    Difference ($262K) minus 20% of ppty val = $132K.

    You can then use this $132K equity as a deposit on another property. But again, it will need to be equal to at least 20% of the new property's value, to avoid lender's mortgage insurance.

    New ppty val = $599K
    Equity deposit ($132K) = 22% deposit
    Loan amount = $467K

    This would mean that you'd then be paying off the loan for your current house, plus the loan for the investment property.

    $388K + $467K = $855K.
    Payments at interest rate ~4% = ~$4K per month.
    Rental income = $2166pm
    Difference = $1834pm

    You would also need to take into account whether you wpuld pay tax on the rental income, rates, landlord insurance, real estate agent fees, etc. to see whether it would be financially viable for you.
    Wow!!
    Thank you!


 

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