Ever wondered how successful investors built up their property portfolio? The secret is equity. As your property portfolio grows, so does the equity that you can access, which will enable you to buy even more homes. But first, let’s talk about…
What is Equity?
Equity is what you build up as the value of your property increases and the money you owe on the property decreases. Basically, your property’s available equity is determined by the value of your property and the amount you have left owing on your home loan. If your property is valued at $500,000, for example, and you have a balance of $230,000 on your home loan, then it means that your available equity is $170,000.
How Do I Build Equity?
You can build your property’s equity in a number of ways. One is by increasing the value of your property, and the other is by paying off more of your home loan. You can of course increase your property’s value by renovating and improving it. However, keep in mind that it may also go down when the property market goes into a slump, which leaves you with a smaller equity.
Available Equity vs Usable Equity
In most cases, lenders will allow you to access up to only 80% of that available equity, which is called your usable equity.
In our previous example, we came up with an available equity of $270,000, however your usable equity is only $216,000 if we cap it at 80%. You can of course access more than 80% of your available equity, but keep in mind that you will be subject to the Lenders’ Mortgage Insurance (LMI), which may translate into several thousands of dollars on top of your loan amount. However, LMI is taxable 5 years after it is taken out.
How Can I Use Equity to Build my Property Portfolio?
So, you’ve built up your property’s equity, now what? If you’re just starting out as a property investor, you can use it to purchase your second investment property and pay the fees and charges involved without having to spend time and money saving up for the deposit. From there, you can use the equity you have built up on your investment property to buy even more properties. Repeat this process several times and watch your property portfolio grow.