How To Use Equity To Buy Your Next Investment Property

How To Use Equity To Buy Your Next Investment Property

Investing in real estate is one of the most effective ways to build wealth over time. Once you step into the property buying and selling world, you’ll find that purchasing your next property becomes a bit easier, especially if you know how to make your existing assets work for you. One powerful strategy? Use your home’s equity or other investment properties to finance new purchases.

This blog will guide you through using equity to buy your next investment property. But before diving in, let’s first understand what equity is.

What Is Equity?

In simple terms, equity is the value of ownership in your property. It’s the difference between the current market value of your property and the outstanding balance on your mortgage. You can think of it like this:

Equity = Assets – Liabilities

For example, if your property is valued at $500,000 and you still owe $300,000 on your mortgage, your equity is $200,000. Over time, as you pay down your mortgage and (hopefully) your property’s value appreciates, your equity increases. This can become a valuable financial asset you can leverage for further investments.

How Can Equity Be Used To Buy An Investment Property?

Using equity to purchase an investment property involves borrowing against the equity in your current property. This can be done through various financial products such as a home equity loan, a home equity line of credit (HELOC), or by refinancing your existing mortgage to unlock some of that equity.

Home Equity Loan

This loan provides a lump sum of money based on the equity in your home, secured against your property. It can be used as a deposit or to fund the purchase of a new investment property. The repayment terms are generally fixed, so you know exactly what you’re in for.

Home Equity Line Of Credit (HELOC)

A HELOC works a bit like a credit card. It allows you to borrow a specific limit based on your home’s equity. This option offers flexibility, as you only pay interest on the amount you borrow, and you can draw funds as needed, perfect for those who want a bit of wiggle room.

Refinancing

Refinancing your existing mortgage involves taking out a new loan larger than your current mortgage. The difference between the new loan and your existing mortgage balance can be taken as cash, which you can use to purchase another property.

For instance, if you own a property worth $600,000 with an outstanding mortgage of $200,000, your equity is $400,000. You could refinance to access a portion of that equity ($400,000), which you could use for your next investment. To explore this option further, learn more about our refinancing services here.

Steps To Using Equity To Buy An Investment Property

Now that you understand what equity is and how to calculate it, the next step is turning that equity into your next investment. Here’s a step-by-step guide on how to do just that:

1. Evaluate Your Current Equity

The first step is to determine how much equity you have in your current property. This is the difference between your property’s current market value and your outstanding mortgage balance.

2. Assess Your Borrowing Capacity

Before you start browsing for investment properties, knowing how much you can borrow is crucial. Lenders will evaluate your borrowing capacity based on factors like your income, existing debts, and the value of your equity. This will give you a clearer picture of what you can afford.

3. Consider The Investment Property

Once you know your equity and borrowing capacity, you can search for an investment property. It’s important to research potential investments carefully, considering factors like location, property type, and current market trends. The right property can make all the difference in your investment’s success.

4. Choose The Right Financing Option

This step is critical. You need to choose the best financing option for your situation, whether it’s a home equity loan, HELOC, or refinancing. Consider factors like interest rates, repayment terms, and flexibility to make an informed decision.

5. Apply For The Loan

After selecting the best financing option, it’s time to apply for the loan. You’ll need to provide documentation, including proof of income, a property valuation, and details of your existing mortgage. Make sure you have everything to speed up the process.

6. Make The Purchase

With your loan approved, you can proceed with purchasing the investment property. Ensure all legal and financial requirements are met, such as obtaining landlord insurance and building property management if necessary.

Benefits Of Using Equity To Buy An Investment Property

Using the equity in your primary residence to help fund the purchase of investment property comes with several benefits:

1. It’s A Low-Risk Investment Strategy

A key advantage of using equity to buy an investment property is the lower risk involved. You’re leveraging an asset you already own, which reduces the need for significant capital or savings. This approach can also offer the potential for capital growth, as real estate tends to appreciate over time.

2. It Eliminates The Need For A Cash Deposit

One of the biggest hurdles to buying a property is saving up for the deposit. By using equity, you can sidestep this issue entirely. Instead of waiting years to save up a lump sum, you can use your existing equity to finance the purchase, allowing you to enter the market sooner.

3. It Speeds Up The Growth Of Your Property Portfolio

Leveraging equity to buy investment properties can accelerate the growth of your property portfolio. You can acquire additional properties more quickly by not having to wait to save for each new deposit. If your new property generates rental income, it can lead to positive cash flow, further strengthening your financial position.

4. Tax Benefits

The interest on loans used to purchase investment properties is often tax-deductible. This can reduce your taxable income and increase your after-tax return, making the investment even more attractive.

Risks To Consider When Using Equity To Buy Investment Property

While using equity to buy an investment property can be a smart move, it’s not without its risks. Here are a few to keep in mind:

1. Increased Debt

When you borrow against your equity, you’re increasing your overall debt. This can strain your finances, especially if property values fall or interest rates rise. It’s essential to have a solid repayment plan in place.

2. Market Risks

The property market can be unpredictable, with various factors influencing its performance. There’s no guarantee that your investment property will appreciate. Conduct thorough market research and consider potential risks before making a purchase.

3. Impact On Future Borrowing

Using a significant portion of your equity may limit your ability to borrow for other purposes in the future, such as renovations or purchasing another property. Consider your long-term financial goals before committing your equity.

4. Cash Flow Considerations

Managing multiple properties means managing multiple mortgages, which can impact your cash flow. Ensure that the rental income from your investment property covers the mortgage repayments and other associated costs.

Practical Tips For Success

To minimise risks and maximise the benefits, consider the following practical tips:

1. Consult A Financial Adviser

Before making any major decisions, it’s wise to consult with a financial adviser. They can provide personalised advice based on your financial situation and goals, ensuring you’re making the right move by using equity to buy an investment property.

2. Keep An Emergency Fund

Even with a solid investment strategy, unexpected expenses can arise. Keeping some funds aside to cover mortgage payments or other costs is essential if your rental income falls short.

3. Regularly Review Your Portfolio

Your financial situation and the property market can change over time. Review your portfolio and mortgage structure to ensure they align with your goals.

4. Consider Property Management

Managing properties can be time-consuming and involve a lot of paperwork. Consider hiring a property manager to handle maintenance, rent collection, and tenant relations, so you can focus on growing your portfolio.

Final Thoughts

Using equity to buy your next investment property is a savvy way to build wealth, but it’s not without challenges. Start by understanding what equity is and how it works, then carefully evaluate your options. By taking thoughtful steps and seeking professional advice, you can successfully leverage your existing property to expand your real estate portfolio.

Remember, every investment comes with risks, but with thorough research and sound financial management, you can maximise the benefits and grow your wealth over time.

If you’re considering refinancing or want to explore tailored home loan options, at Rateseeker, we’re here to help. Contact us today to discuss your financial goals and discover the best strategies to expand your property portfolio confidently.