If you want to start investing in property using equity from your current home, it can be hard to know where to start, so we enlisted the help of Tamara Wrigley to offer a step-by-step guide to doing exactly that. As a property developer for more than 23 years, here Tamara shares her sure-fire strategies on how to use equity to buy and investment property.
Get your finances in order
This is where you need to make sure you have your finances in order, know what your bottom dollar is and what your maximum return is on a property. Example, think – ‘if I needed to drop the rent, can the rent still service the loan? When property is in high demand, what is the highest amount of rent you can achieve? If a tenant (commercial or residential) stops paying the rent or leaves at the end of their tenancy, can I afford to make the mortgage repayments while I wait for a new tenant to be found?’ A lot of people are driven by fear when wanting to invest in property. Not the fear of buying an investment property, it’s the fear of servicing the loan or finding the money to service the loan if things go pear-shaped. Eliminate that fear by knowing your numbers before you buy, put those contingency plans and the “What ifs?” into place before committing to purchase.
How to borrow the money for your investment property
When you borrow money from a bank, they look at several fundamentals. The first fundamental is the LVR (loan value ratio) in relation to the property. Traditionally the bank will lend up to 80% LVR.
Another component that the banks look at is the IVR (interest variable ratio) which also provides the bank with a caveat to ensure that the borrower can service the debt. When servicing the debt, the bank takes into account the income of the borrower through income such as wages and rent. This caveat also ties in with the serviceability criteria that the bank requires the borrower to meet. Traditionally, the IVR and the serviceability criteria will change depending on the interest rates available at the time and the state of the market.
How do you boost your equity?
You need to understand how you can increase the market value of your property. That could be by way of home improvements which will add value to your property.
Another way to increase your equity is to reduce the amount of debt on your property and pay it down as quickly as you can. Having your investment monies going straight onto your loan is a great way to get ahead. If you can master this and you can understand the bank’s requirements for serviceability, you can grow your portfolio very quickly. To achieve this, you should have an excellent relationship with several financial brokers, your bank and your accountant. To increase your revenue your accountant can advise you on whether you should depreciate the property to help increase your financial return.
Over time you can get natural growth from owning property which enables you to have natural growth in your equity. If you buy in the right locations, increasing the value of your property to create more equity will enable you to borrow more money to increase the size of your property portfolio.
The biggest restriction around Covid-19 is the bank’s ability to lend money as there is a potential for the market to drop off. It all hinges on which market you are in. The overall positive in using equity is that it allows you to borrow more money to grow your property investment business in any market.
The positive about buying in this current climate is that you may be able to purchase property at a lower price. Then, post Covid-19, your property may increase in value which, in turn, will create more equity in your property on the basis that the market bounces back.
With ups, there are also downs – and the negative about using your equity during COVID, is that if you buy a home in a market that is decreasing, then that equity quickly erodes. From a finance point of view, your loan subsequently changes for the worse. You must be careful that your portfolio can sustain itself, even if the equity that you have created suddenly gets reduced as a result of the pandemic. To resurrect your equity, whatever you buy depends on the purchase price and not necessarily on the sale price. As long as you have purchased well, whether in the pandemic or not, as long as the property can sustain its true value, you should be able to weather the storm.
Should we still be investing in property in the current climate?
The economic impacts of the global pandemic may impact your decision to invest right now, especially as Australia is said to be entering its first recession in 29 years, but there are also some great property bargains out there, and people always need somewhere to live/rent.
What if another GFC hits?
The whole COVID-19 pandemic is reminiscent of the 2008 global financial crisis (GFC). If we have another event like the GFC it’s important that your various property loans are with different banks so that no one bank has full control over your investments.
In 2008, there I was cruising along developing projects in Brisbane, and I was using my equity to fund my next projects. Then BOOM, the GFC hit. I was told by the bank that was funding my projects that they were calling in their loan, despite the fact I always made and met my repayments and had never defaulted. I was the perfect client.
The banks got scared, rightfully so, but the fallout was I had to find $4 million dollars in 60 days to pay back the loan. As you can imagine, I it was extremely stressful for about a week, then I went back out to the banking marketplace. Thankfully, a second-tier bank was more than happy to pick up my tab and help me with my vision.