Tapping in to home equity to fund investment properties has become a common strategy for savvy property investors. If done well, it can create some amazing opportunities. However before you dive head first into the investment property world, here at Reliance we find it imperative to help you understand how equity works and what you can do to get the most out of this valuable asset.
Equity is calculated by taking the market value of your property and subtracting the amount you still owe on your loan. For example, if your home is valued at $400,000 and the amount owing on your loan is $100,000, your equity in the property is $300, 000.
Your home’s market value is an important element in your equity calculation. If the value of your property goes up, you instantly have more equity to play with.
Equity-building ideas for your home
There are ways in which you can actively increase your home’s market value and build up your equity. Possibilities include, home renovations, regular maintenance and a natural appreciation in price. You can also increase the value of the equity in your home by reducing the size of your home loan.
Let’s explore these ideas further;
- Renovations to create value: Make sure you pick projects with the highest return on investment such as kitchens and bathrooms. Every cent you spend will count so think about your projects wisely.
- Regular upkeep:A home that has been left to deteriorate will lose its value in the market. Regular updates and keeping on top of all the little things such as gardens, ceilings and flooring will help maintain your home’s value.
- Rising market prices:The value of your home may appreciate naturally over time with very little input from you. Keep in mind that the reverse can also happen.
- Increasing monthly payments: Every dollar you pay off from your loanreduces your debt and hence increases your equity – just make sure your lender applies those payments to the principal.
- Make additional lump sum payments:Again the aim is to reduce the size of your debt which will lead to an increase in equity.
Purchasing property using equity
Accessing the equity in your home is a fantastic way to grow your real estate portfolio. Equity can be used as a deposit for an investment property, to pay for renovations or provide you with the option to go the next price point. However, like all major life purchases there are a few things to consider when harnessing your home equity for investment in property.
CEO and Head Coach of Real Results Network, Michael Sheargold shares with us the three most important things you should consider when making investment purchases:
- Be realistic about the costs and risks associated with real estate purchases. Make sure you have a budget (and buffer) in place for things like legal fees, rates and stamp duty.
- Only release the equity you need and free up any excess for other investments.
- Make sure you have enough equity left to deal with some of those curve balls life sometimes throws at you. As tempting as it may be to use all your equity to achieve your real estate goals even quicker, it makes sense to have resources behind you when things don’t go to plan.