Good day! My name is Ben Everingham and today we’re gonna talk about how to use equity to buy your next investment property.
Good day! My name’s Ben Everingham and I’m the director here at Pumped On Property and today we’re gonna talk about how to use equity to buy your next investment property. Equity has seriously got to be one of the coolest things ever invented, and for those of you that are unfamiliar with the term equity, equity is basically the same as cash. It’s just slightly different because it’s leveraged against your current investment property. I’ll give you an example. Equity is just the difference between what you owe on the property, and the property’s value now. So let’s say that you bought a property ten years ago for three hundred thousand dollars in Melbourne, and now that property is worth five hundred thousand dollars. So, let’s say you didn’t pay anything off the property over the last ten years and you still owe three hundred thousand dollars on your loan, and the property is now worth five hundred thousand dollars. It means you’ve got two hundred thousand dollars in available equity that you could potentially refinance or redraw out of that property to use to go and buy other investment properties. So equity is absolutely amazing, and the reason why, is because equity is as good as cash. And we’re gonna walk through why it’s as good as cash over the course of today’s video.
So in terms of how to use equity to buy an investment property, there’s a couple of steps that you need to undertake. The first step is to actually have a look at your property and take a look at the market and see if the properties has actually risen in value in your local area. And so there’s a number of ways that you could do this. You could look at the median house price of the area right now, and then, look at the median price, or you obviously know the price you purchased your home for. So let’s say you bought a three bedroom, one bathroom unrenovated home and purchased it for three hundred thousand dollars, then three years later, it’s now worth three hundred and fifty thousand dollars. It means there’s fifty thousand dollars in available equity there based on comparable sales in the area.
Another cool thing is if you’ve owned the property for a long period of time, you could look back at the average annual price growth on that property. Let’s say you’ve owned it for three years or ten years. And you can find that information really easily, by just buying one of the Your Investment Property magazines and having a look in the back of the magazine for your suburb. For example, the house and looking at ‘okay, over the last then years on average, this area has gone up by five percent since I’ve bought it’ or ‘in the last three years, the area’s gone up by twenty percent’ which means, you know, there may be some available equity there for you to tap into.
Another more sophisticated way of tapping into it is actually looking at recent comparable sales and going ‘okay, I paid this for my property. This properties has recently sold’ so there may be some equity.
The reason I say have a bit of a look yourself first before you call your mortgage broker or your bank to go out there and actually do a valuation is to just get a bit of a feeling. To put it into perspective, when I was younger and really excited about my properties, I used to get them revalued every six months because I wanted to see how much equity I had and if I could use that equity to buy another property. These days, obviously, I’m not as crazy as I was when I was just getting started and for a lot of people watching, I’m sure, you’ve gone through stuff where once a month, you’re jumping on realestate.com and looking at the values to see if your house price has gone up. But, you know, it’s important to just get a baseline understanding before you waste anybody else’s time revaluing a property.
So the second thing that you do after you have that look at what the market’s done or doing, is to get your mortgage broker, or bank manager, or bank, to actually send somebody out to revalue the property. Now, in the current market place, and this is 2016 when I’m recording this video, lenders have really tightened up. Things are getting a little bit harder for investors, for owner-occupiers to borrow money, especially when you compare it to two or three years ago. So what that means is that you might think that the property is worth this, and the evaluation comes back at this. And that’s happening all the time, at the moment, particularly in the big cities where they’re starting to slow down the evaluations a bit to stop people continuing borrowing money for property.
So it’s important to not get emotional about it. If you really don’t like the valuation that comes back, you can contest that valuation by providing some information or a little bit of a business case. You could provide some market appraisals from a couple of local, top performing agents. You could look at comparable sales and provide a bit of business case that other properties within a thousand kilometre radius of your property has sold for more. You could, if you’ve done a bit of a renovation, put exactly what you renovated into this report, as well. You could look at the average annual price growth, if you bought the property quite a while ago and put that in there, as well. Valuers legally have to take that information into account when they’re doing their valuation. Sometimes, I’ve seen valuations come back where one bank values a property at six hundred grand, and another bank values the same property at four hundred and fifty grand, and I kind of scratch my head because an agent would sell that property, any day of the week, for 700K.
So there’s all sorts of different things that come into play, but as long as you’ve got enough equity to release some money for your next purchase, at the end of the day, that’s all that matters right now.
Once you’ve revalued the property, say your broker or your bank has gone out there and has done your valuation for you, the next step is to actually get the bank, or the mortgage broker, to refinance the loan and release that equity. So in the old days, before people knew better, people would refinance their own home because a lot of people have great equity in their own homes. And the bank would tie that home versus the new property, which is all well and good until we have a global financial crisis, or you lose your job, or your business fails, and then your investment property, which you can no longer make repayments on, is connected to your own home and the bank comes in and says ‘I want everything’. So structuring the refinance is super important. And that’s why you should be talking to a licensed mortgage broker about your options there, and for anybody that needs an introduction to a great broker, my broker is about forty years of age, he owns somewhere between twenty five and however many properties, he really won’t tell me. But he’s doing well, and he knows his stuff, and he’s been in the game for a long time.
Making sure that when I’m refinancing properties, what I’ll do is, let’s say I bought my property for three hundred grand and that’s how much I owe. Now it’s worth five hundred, I’ll refinance up to eighty percent of the difference so that I’m under lender’s mortgage insurance, and then what I’ll do is I’ll refinance that money into a separate account and then take that money to a different bank and do the transaction there. So you’re keeping everything at arms length, nothing is crossing secured, and it’s a more safe way, I suppose, of structuring things. So get legal accounting and mortgage broking advice and that. That’s just what I’ve done personally in the past, it’s definitely not advice by any means. But it is very important to think about the way that you’re doing things.
The last thing is after you’ve had a look at the market, done your valuation, and refinanced your property, the next step, I suppose, is the exciting thing, which is jumping back into the market and finding another high quality property. Obviously there’s so many things about property in terms of when you’re thinking about it, but some great rules of thumb are something with owner-occupier appeal, in a great suburb, below market value that you could add some value to.
So I hope today’s video, which is all around how to use equity to buy your next investment property, has been positive. Equity is amazing, I absolutely love it, and it’s the way that most Australians that aren’t earning millions of dollars a year move forward to buy their next investment property. So until next time, stay hungry!