How to Use Equity in Your Existing Property to Invest in Real Estate

Building a real estate portfolio can be one of the most effective ways to grow your wealth, and one of the most powerful tools for achieving this is equity. If you own a property in Australia, you may have accumulated equity that can be leveraged to finance new investments. This strategy allows you to expand your portfolio without needing a large cash deposit.

Here’s a detailed guide on how to access and use property equity, its benefits and risks, and strategies for leveraging it to grow your real estate investments.

What is Property Equity?

Equity is the difference between your property’s current market value and the remaining balance of your mortgage. For example:

• If your property is valued at $800,000 and your outstanding mortgage is $400,000, you have $400,000 in equity.

However, not all equity can be accessed. Lenders usually allow you to borrow up to 80% of your property’s value, minus your existing mortgage. This is known as your usable equity.

Example:

• Market value: $800,000
• 80% of value: $640,000
• Mortgage balance: $400,000
• Usable equity: $240,000

How to Access Equity in Your Property

The process of accessing your equity involves working with your lender to unlock the funds for investment purposes. Here’s how:

1. Get a Property Valuation:
   Your lender will arrange a formal valuation to determine your property’s current market value.
2. Calculate Your Usable Equity:
   Based on the valuation, your lender will calculate how much equity you can access (usually up to 80% of the property’s value).
3. Refinance or Redraw:
   • Refinance: You can refinance your existing loan to access the equity as a lump sum or a line of credit.
   • Redraw Facility: If you’ve made extra repayments on your mortgage, you may be able to redraw those funds.
4. Loan Approval:
   The lender will assess your financial situation, including income, expenses, and credit history, to approve the equity release.
5. Use the Equity as a Deposit:
   The released equity can then be used as a deposit for purchasing another property.

Benefits of Using Equity to Invest

1. No Need for a Cash Deposit:
   Equity allows you to invest in property without needing significant upfront savings.
2. Leverage to Build Wealth:
   By leveraging equity, you can acquire additional properties, increasing your potential for capital growth and rental income.
3. Tax Benefits:
   Interest on the loan used to invest in a property may be tax-deductible, reducing your taxable income.
4. Diversification:
   Using equity enables you to diversify your investments across different property types or locations, reducing risk.

Risks of Using Equity

While using equity can be a smart strategy, it’s not without risks.

1. Increased Debt:
   Accessing equity increases your total borrowings, which can strain your cash flow if not managed carefully.
2. Market Fluctuations:
   Property values can decline, reducing your equity and making it harder to refinance or sell if needed.
3. Higher Repayments:
   Borrowing against your equity means higher monthly repayments, which could be challenging during periods of financial difficulty.
4. Risk of Overleveraging:
   Overborrowing can leave you financially vulnerable, especially if rental income doesn’t cover your expenses.

Strategies for Using Equity to Build a Property Portfolio

1. Start Small:
   Use your equity to invest in a smaller or more affordable property to minimize risk and maintain manageable debt levels.
2. Focus on High-Growth Areas:
   Research locations with strong capital growth potential to maximize the returns on your investment.
3. Generate Positive Cash Flow:
   Invest in properties that provide rental income sufficient to cover your loan repayments, reducing financial pressure.
4. Diversify Your Portfolio:
   Avoid concentrating your investments in one area or property type to spread risk.
5. Reinvest Growth:
   As your new property grows in value, you can use the equity from it to finance additional investments, creating a snowball effect.
6. Work with Professionals:
   Engage a mortgage broker or financial advisor to help you navigate the lending process and select the best investment strategy.

Case Study: Building a Portfolio Using Equity

Scenario:

• Primary residence value: $1,000,000
• Mortgage balance: $500,000
• Usable equity (80% of value): $300,000

The investor accesses $300,000 in equity and uses it as a 20% deposit to purchase an investment property worth $750,000.

• Loan for investment property: $600,000 (80% of $750,000)
• Rental income: $700 per week ($36,400 per year)
• Potential capital growth: 5% annually

This strategy allows the investor to grow their wealth through rental income and capital appreciation while maintaining their existing property.

Tips for Managing Equity-Backed Investments

1. Maintain a Safety Buffer:
   Keep a financial buffer to cover unexpected expenses or interest rate increases.
2. Regularly Review Property Values:
   Monitor the value of your properties to identify opportunities to access additional equity.
3. Pay Down Debt Strategically:
   Focus on reducing non-deductible debt (like your home loan) to improve your financial position.
4. Keep Track of Market Conditions:
   Stay informed about interest rate changes and property market trends to adjust your strategy as needed.

Final Thoughts

Using equity in your existing property can be a powerful way to grow your real estate portfolio in Australia. By understanding the process, benefits, and risks, and adopting a strategic approach, you can leverage your property’s value to create long-term wealth.

Ready to unlock your property’s potential? Speak with a mortgage broker or property expert today to explore how equity can work for you!