[LIVE] How do you use equity to buy an investment property?

[LIVE] How do you use equity to buy an investment property?


We are the hosts of The Property Couch
and we wonder if you’ve ever… When it comes to investing in
property, turn at a barbecue, you go into a restaurant, hang out with your mates and they’ve
just bought an investment property, you think…… Because they are thinking it aren’t they right?
They’re not gonna… how did you.. Unless it’s really really close
friends but if they’re out with a sort of the networking, how did you buy that
investment property? How did you do it? How’s it possible? Because
I think I own about the same amount of income as you, we got the same amount
of kids, we sent them to the same schools… we’ve got dogs… How is it that you can
afford an investment property and I can’t seem to find any spare money to
buy an investment property myself. Because Bryce, most people think that
they’ve got to save up all this money to be able to do it when there is another
way. So why don’t we sort of show people a bit of 101? Yes. How do you use equity to buy an investment property? Remember that back in the day? Equity Mate! 🙂 Alright, let’s have a scenario here. Let’s talk
about the situation where someone… There’s a nice house there Bryce.
You like that? I like that.
It’s Edwardian. Okay that’s your principal place of residence and I’ve got $700,000 worth of value and
let’s say they’ve got $400,000. So that’s the value.
And that’s a $400,000 mortgage or debt. Which leaves
them, with $300,000 in equity Ben. But here’s the deal.
Their cash flow is pretty tight. Paying off the mortgage and so the surplus at
the end of the month makes it difficult for them to save a deposit to buy any
more real estate. So the question remains… How do they do it?
Well there’s a couple things we need to understand. Firstly here right. So when
we’re talking about the principal place of residence, even though this
might be the equity position, some of that is going to be left for the bank.
So they want to have around 20% of that. So we’re left with what’s left over. Now in terms of a $700,000 property, if that means that the equity is at 80% level, then that’s
$560,000. So $700,000 times 80%, $560,000. Now we’ve got a $400,000 debt. So ultimately we’re left with a
$160,000 of our available equity. Releasable equity to go and buy what Bryce? Well let me see if I can draw a
house. This is an investment property all right? Let’s see if we can do that. So
this investment property… Let’s give us some numbers.
Let’s say this investment property, it’s gonna be
$500,000 and I don’t have a deposit saved.
Right so you’re saying I can get that investment property without a deposit.
Correct because what I’m also saying is, that’s what the value of the
assets going to be. But we’ve also got costs don’t we Bryce? So we work out 5%
costs, what does that mean? That’s $25,000. So to settle on this
property, I don’t need $500,000. I actually need $525,000 to complete settlement. So no wonder people
thinking, “I haven’t saved up another deposit.” They might have in their
bank account $30,000. Nice little buffer but the reality is if we can access this
equity here, we’re going to be in a position where we can potentially
acquire that property. Now we learned earlier, in regards to the bank wanting to
see 20% value in that property. So a $500,000 property, you can potentially
lend against this property $400,000. Remember we need $525,000 and I don’t have a deposit. I’m a $125,000 short so therefore that’s the flaw in your argument. Yeah, so that’s why if you
grab that little red pen Bryce, draw a line over here for me…
Bring me $125,000 from that position okay and
then ultimately I have $525,000 to secure this
investment property and we still have $35,000 left over
then as a buffer. If you were to release all of that equity, you buy the
investment property as you say you don’t need the cash deposit. You take
it out of your releasable equity and then for those who sleep at night
wondering what happens if an unplanned event happen, they’ve got
35 there, they might also have another thing because remember, they haven’t used
any of their own cash. They may have that. If you listen to our work in an offset
account against that $400,000 property, that’s their after-tax money. We want to
leave that over here which means that this investment property is going to be
150% of lending. So the interest on that investment property
is going to be deductible. That’s a good news story when we’re talking about
being in a position where we can cover those costs. We’ve obviously got the
rent coming in as well so there will be a shortfall usually when you’re
borrowing that much. So you’ve got to be mindful of that and I think that is
also a really important message here is, we’ve talked about equity don’t forget
the other important piece which is… You’ve got to have cash flow. You do have
to have the available surplus every month to be able to borrow this money.
Now in terms of how you would work that out.. It’s your income plus the percentage
of the rental income is going to allow you to work out that borrowing power.
Well said Ben. So if I’ve got a property that’s worth $700,000, so you and your friend who back at that barbecue… and
let us know what you think of this LIVE teaching folks in the comments. We’d love
to hear that but let’s just say at the barbeque, you’re both got a $700,000
property and let’s just be really conservative and let’s just say the value
is going up by 5%. That means in this case here and your net
worth would be going up by thirty five thousand dollars so you both be wrong
yep got it but in this scenario here if we’ve got seven hundred plus 500 that
means you’ve actually got a portfolio with 1.2 correct and then if they both
got 5% the person who just has their principal place of residence goes up by
35000 but this one is actually going up in well that’s 25,000 on top of that
isn’t it so grand total 60k absolutely so folks that
is why you would consider being in a leveraged position subject to your risk
profile you’re in a leveraged position so that you can control more assets so
that over time you can let the power of compounding and time work in your favor
so that the portfolio continues to grow in value now Ben just before we go on
this one here yep you are an ex mortgage broker what you’re a mortgage I’m not on
the tools’ as much as I used to be browser FC crimes in the Financial
Review is the mortgage broker a couple what line of credit draw down as equity
put it into offsets maybe you just a quick chat around what the mechanics of
that looks like yeah so the mechanics of that is always the separation of the two
debts so how we would structure that loan is we’ve got loan one which is
effectively this four hundred thousand we’re getting a little bit tight on our
on our board here are the rules there there’s a little bit over this call it
loan two would be that 160 yep okay so that is nice clear differentiation in
terms of what is owner-occupied debt and what is investment debt so we’ve got
that nice and clear and then remember this loan we’re getting over here this
is technically in loan number three in our overall loans but it’s the loan
that’s secured against this property so we don’t want to cross securitize our
debts in regards to that so it’s that that four hundred plus the one that 125
that we’re borrowing here this one down here that is the deductible debt so
that’s the overall debt that we take against that property and we’ll be able
to deduct that so in terms of when I’m looking at all this stuff there are some
obviously mechanics around that we so don’t speak to a licensed mortgage
broker in terms of investment savvy mortgage brokers or all I said and if
you are thinking about investing in property we also say go and see a
qualified property investment advisor they will give you the numbers they will
show you how all this works don’t take advice on investing in property from a
mortgage broker take your advice for investing in property from a qualified
property investment specialist and they will take you through this because in
your cash flow scenario you may not have enough cash flow to support
a $500,000 purchase especially if you’ve got the kids coming up to a higher
school level or whatever that may look like so it might mean that you have to
get a four hundred thousand dollar property or a 350 or it might mean that
the strategy for what we’re buying may not be a growth asset it might be a
yield asset so there are different permutations and combinations that are
need to be tailored for you don’t ever ever get someone to come into your
living room there was a so-called property advisor their properties
brokers and tell you you need to buy this asset just doesn’t work the test
for that Toobin is if someone does that you straight away say to them so what is
the best solution for me yeah and the the words that come out of their mouth
next is critical yeah because if they’ve actually got a solution for you
that is a red flag one red flag there versus them asking more qualifying
questions to red flag is usually how you get paid yes so if you’re getting paid
from the developer well isn’t that conflict you know way like you know
that’s conflicted remuneration you’re trying to sell me a product so you’re
acting as a real estate agent not necessarily acting as a trusted adviser
so they are the two red flags for me exactly what brass was saying and then
how are you paid and then ultimately if they’re not diagnosing taking a really
deep dive into current and future cash flows then that also rings bells to me
that they may not be at the highest level of revisor
so you may want to get a second opinion on their advice while serving so folks
that question that we started this live with was how do they afford it hopefully
that helps out they actually are not finding more cash out of their budget
they’re using equity to use as a deposit so that they can actually get themselves
into the market so they have a focus if if that was something that was on your
mind and you’re wondering how that worked
hopefully that’s provided you with some clues now quit he made equity equity
made all I get along hi folks Ben and I are doing something different next week
and we are going to do this style for two hours three days in a row
so we are going to live teaching basically what we’re going to do is
we’re going to go through our best-selling book the ant you go to
property investing and we’re going to pick apart the frameworks that are in
here so that you can see that unpack live and the reason we’re doing that is
really really simple we have a community of people who were except to us been and
they’ve said hey look I need another level of understanding information
teaching that is in between where I am now and actually acting on the advice so
we are providing an online opportunity and online course for people that will
be will be selling people will be paying for that yep what we’re gonna do is we
give you the opportunity to join us live for free
and you can see it we there’ll be no replay and basically what we can do is
we’re going to invite you along you’re gonna see all the teaching there’s a
framework the first days about the foundation the second day is all about
the frameworks Bend and then the third day is about bringing it all together
and we’re going to do some really cool stuff so if you want to be a part of
that there’ll be a link below and you can register for that we will send you
all the details but we would love to have you along and Ben if anyone asks a
question I’m going to answer it live and I’ll get a book just for asking the
question bring you know and what I like about this price is we do a lot of audio
teaching in the podcast now we’re actually going to have a whiteboard in
front of us so we can actually do some visual teaching as well so I think it’s
a great combination to cement the learnings that you’ve had from the
podcast and we’re gonna take a deeper dive into that as well folks absolutely
free we will sell it at some point in the future but next week is totally free
for you to turn up so if you want to turn up we have a friend or an associate
or a colleague please forward this and send it to them invite as many people as
you like because it’s going to be live it’s going to be interactive enough some
behind the scenes we’re gonna answer your questions live and at some point in
the future other people will be able to access that but it won’t be able to be
accessed free like it will be next week Ben so we suggest that you pop along and
this is this is the styles and event yeah if someone just turned up and have
a look at the board they want a bit or maybe maybe need to start from the start
because there’s a lot of moving parts but that’s look you know property
investing sounds easy but in practice there is a process it’s not an
and we’re going to step you through each stages of that so I’m excited by the top
level view we’re going to have at the start but as we work through those three
days we’re going to get right into the weeds in terms of how it all works we’re
gonna go through finance property and money management and bring it all
together so this book actually makes sense I’m gonna teach that law so folks
we’d love for you to join us there’ll be a link below make sure you check that
out and it will also be a link on the screen here somewhere and of course
we’re about an hour away Ben from this week’s property care
we are the podcast so we would love for you to tune in today we’ve got an
amazing guest who has overcome a very very rough start and when it comes to be
but now has a very successful multi-million dollar property portfolio
so check that out today at 3 o’clock on the property couch calm that I you

7 thoughts on “[LIVE] How do you use equity to buy an investment property?

  1. Great vid!! Be great to see the structure in more detail will the released equity be a new loan secured by PPR still? Meaning only a imvestment loan of 400k as a single security loan of 525k secured by 500k asset wont work.

  2. Wait so they're left with…
    Their original mortgage = 300K
    A secondary loan which consist of their equity = 160k
    Then a third loan which covers the rest. = 400k.
    And their rental income needs to be more than the repayment of 2nd and 3rd loan combined in order to make positive cash flow?

  3. Hi Guys, thanks for the youtube clip on home equity, I have an investment property fully paid worth $450,000 plus $35,000 cash, I amwanting to but a second property but unsure which way to go about it, either using equity from the property I own or just using the 35,000 cash for a deposit.

  4. Great video, thanks for the time and effort you guys putting in to share your expedience , just wondering how we can beat land tax when we own multiple properties

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