If I had a dollar…… for every time a first time investor approached me and said “ So we have over $500k worth of equity in our house (Principal Residence), where can we buy a nice investment property for $500k?

This might seem logical, you have $500k worth of accessible equity built up in your house and now want to jump into the property investment arena. So why would you not just go out and use all the equity from your house to purchase one property outright, with no debt? Well there are a number of reasons, and here they are:

1. The loan interest that you pay to service your house (Primary Residence) is not tax deductable. That means that while you are not paying any interest on the investment property loan (As you don’t have a mortgage) you are paying interest on the 500k you just pulled out in equity to finance the deal. So all the rental income that you generate will be hit hard when tax time comes around…….

2. Cash gives you options, by using up all of your equity to purchase one property you now have nothing left, no buffer, no safety net. What happens if there are unexpected renovation or repairs that need to be carried out on either of the properties? Your now in trouble.

3. By Buying one property worth 500K you have put all your eggs in one basket, you now no longer have any cash, you have minimal tax benefits and you have placed all of your risk into one property. What if the area you just bought in is hit by a natural disaster, such as a flood, or fires, or if a new Highway is going to be built meaning that your capital growth will be stunted for years to come….. There could be one of many.

Buying property is about taking calculated risk, having a strategy, spreading your risk.

 Ok so that makes sense yes? Where to from here…….

 

Well instead of buying 1 property outright by leveraging the equity in your primary property lets look at how we can use the above to purchase more than one property, increase our tax benefits, leave us with a strong buffer (Cash) in case something goes wrong and let’s spread out our risk.

What if we were to buy 4 investment properties worth 400K each?

How??….. This is how……

To purchase a 400K property @ 80% LVR (Loan to Value Ratio) you will need:

Purchase Price = $400K

Loan @ 80% = $320K

Deposit @ 20% = $80K

Buy costs including Stamp duty, legals, pest and building etc = 5% = $20K

To purchase a 400K property you can see that you will need the initial 20% deposit and the buy costs which will total $100K.

So by using this formula you can see that you can now buy 4 x 400K properties, that’s a total combined property value of $1.6 Million! Sounds a bit better that just one $500k Property yeah……

 

Why 80% LVR? This means you are borrowing 80% of the property value, if you borrow more than 80%, say 90 or 95% you will pay LMI (Lenders mortgage insurance)

This is not always a bad thing, like I say, Cash gives you options, you may want to setup your first few loans at 90% in order to make your dollar go further and build your portfolio quicker. Sometimes it takes money to make money…..

 

Why would having 4 Properties that I have to mortgage @ 80% be more beneficial than owning one?

 

 1. By owning 4 properties you are now spreading your risk, these properties may be in different locations, have different attributes, different formats i.e. units, houses, duplex etc.

2. As mentioned above, by acquiring 4 properties with a total worth of $1.6Million, your capital growth is now more than triple that of the scenario of purchasing just one property at $400 – $500K outright.

If Capital growth was 7% pa on the $500K property the property would be worth $535K after the first year (That’s % $35K in growth) .

If Capital Growth was 7%pa on your $1.6M property portfolio, your properties would be worth $1.712 Million (That’s $112K in growth) after the first year (More than Triple)

3. You now have a $100K buffer! So you had $500k, you have used $400k to purchase 4 properties worth 400K each @ 80% LVR, you still have $100K left in the bank as accessible CASH. This buffer can remain there in your offset account or as available redraw for any scenario that may arise…… and it is still sitting against your primary loan reducing the interest payable that can’t be tax deducted.

 

Remember what I always say….. CASH GIVES YOU OPTIONS!!!!!!!! Don’t use it all up!!!!

 

Of course we are all in very different situations, some of you will have a great level of untapped equity in your primary place of residence that you can leverage and others may have a small amount, it does not matter.

The same can be achieved with 100K worth of equity, instead of purchasing one property worth 400K, you can purchase 2 properties worth 200K or 4 properties worth 100K, buy and hold them and watch them grow!!!!

 

Let me show you how to access that equity to start building your property portfolio right now!

Email me any questions you may have and let’s get you started!