Using your equity

You’ve made the decision to buy an investment property and you know the rental market will work in your favour.

You are keen to use the equity in your current property to buy an investment as part of your retirement plan.  But how much equity should you have and what are the potential pitfalls in jumping in too quickly or without enough knowledge?  

The first rule is to keep borrowings less than 80% against an asset. 

Anything more than 80% creates more risk for the lender and more for you. Cash flow is the prime consideration when you are buying an investment and knowing all of the variables that can have a negative effect on your investment. We can lay everything out with you and help you to understand whether the time is right to buy right now. 

Many people think if the rental income is more than the mortgage repayments then it is a no brainer. But what about the costs – the clip taken by the property manager each month from the rent, the rates, the broken hot water service, the flooded bath that damages the flooring, the body corporate and elevator fees in an apartment complex, the upkeep of the communal swimming pool and gym?

Knowing what these costs are and adding them to the mortgage payments each month will help determine if you are going to be in negative cash flow and if you can afford the extra each month. 

It’s also wise to consider the variables – what of the current second income or weekend side hustle disappears, or the tenants leave and new tenants are hard to find for a few months, there is a change at work and you are forced to take a redundancy, or you are laid off. We can help you devise a plan, a buffer, a ‘sleep at night’ account so you can manage the repayments when circumstances change.

“Our advisors can help you look at best- and worst-case scenarios and evaluate your current or future cash flow so you are not forced to sell the property under duress because your situation changes.  You don’t want to be forced into a position where you take the first offer, rather than the best offer, just because you have to.”

It is rare to borrow 100% of a property’s value without taking all of the actual and potential costs and comparing them to actual or potential income capacity of the property.  We can guide you through this and help you make a plan round the right time to invest 

It doesn’t matter in the short term what the property market is doing – as long as your cash flow is managed, you are okay.  As long as you know you have a buffer set aside for an emergency, you can manage the repayments with your current cash flow – you don’t make or lose anything until you sell. 

We strongly recommend you seek out financial advice from a trusted and qualified financial professional who will be able to devise an investment strategy tailored to your unique needs so that you can feel confident about buying an investment property using the equity in your current property.

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