The idea of property investment is one that appeals to many Australians. However it is sadly overlooked because of the misconception that it is only within the reach of the wealthy.

The reality is that with the right finance, planning and strategy property investment may be within reach and easier to achieve than you think.

Ease the deposit burden

One of the key challenges to breaking into property investment is raising a deposit. Property buyers are typically required to contribute 20 per cent of the property’s value, and for some this can be a stumbling block.

However there are solutions.

Existing home owners may be able to unlock equity – or the increased value – that’s built up in their own home to cover some or even all of the down payment on an investment property.

I will use a client scenario to illustrate how borrowers can capitalise on the equity in their homes to purchase an investment property.

Case Study – Ian and Sue used the equity in their home to break into the property investment market.

Ian and Sue bought their 3-bedroom unit in 2009 for $447,000 putting down a 20% deposit of $89,400. They took out the balance in a loan for $357,600. The couple recently decided that they’d look at breaking into the property investment market. As such we arranged to meet up and discuss their options and finance.

Firstly we got a valuation of their home. We discovered that it was now estimated at $750,000. Over the years, Ian and Sue had paid off $150,000 off their original loan. This left $207,600 owing on the property.

Today’s valuation of the property, less the outstanding loan, left them with $542,400 worth of equity.

Next we refinanced their own home to the loan ratio of 50% of its value. This freed up some equity for an investment. Based on the current property value and after confirming that they could afford the repayments, they would be able to borrow $375,000. This provided an additional $167,400 available for investment purposes once we deduct the outstanding loan balance on their home.

This strategy appealed to Ian and Sue because otherwise they would have needed to liquidate their managed funds to raise the deposit for the investment property.

This allowed them to put down a 20 per cent deposit on a $675,000 two-bedroom apartment. The deposit came to $135,000 leaving the $32,400 to cover stamp duty and other expenses. They then took out an additional loan of $540,000 to cover the rest of the purchase price – a loan to value ratio of 80%.

Summary

Ian and Sue had a larger borrowing on their home and investment property. However through good research on finding the right investment property, the additional repayments were able to be covered by the rent the investment property is generating. Additionally the property has long term capital growth potential.  Ian and Sue took out an interest-only loan for the investment portion which means they can better manage their monthly outgoings and cash flow, and prioritise paying off their owner occupied home loan.

Anthony Landahl | Equilibria Finance | March 2017

Note: This article has changed the names of the client and some of the actual details for confidentiality.

Note: This is for general information purposes only and does not constitute advice. With all of these options there are a number of considerations outside the scope of what is covered in this article that you need to understand to ensure your personal circumstances are taken into consideration.