Have you seen your home equity grow over the last year or so? With property values increasing significantly and record low mortgage interest rates, now could be an ideal time to use your increased equity to buy a rental property.
We often see customers who are in a position to invest in their first rental, but haven’t taken that step yet — maybe they are risk averse, or too particular about the type of property; some people are just too busy to start the leg work, or sometimes they just don’t realise they have the potential to invest.
If you have gained enough equity in your own home, you might be able to invest in a rental property without having cash saved for a deposit. The Reserve Bank restrictions require at least a 30 percent deposit for a rental property that’s an existing house (it can be less for new builds).
Whether you have cash saved, or equity in your home to use, the first step is to work out how much you can borrow and what that will allow you to do. Then you can start looking at the property market.
Here’s an example of how you can potentially use the equity in your home as a deposit for an investment property:
- You have a home worth $550,000 with a mortgage of $260,000
- You can borrow up to 80% against your owner-occupied property to create a 30% deposit for a rental property
- 80% of $550,000 = $440,000
- Deduct your mortgage of $260,000 from this and you have $180,000 equity available
- $180,000 is 30% of $600,000 (to calculate this divide $180,000 by 0.30)
- Using your $180,000 equity you could 100% finance a rental property up to the value of $600,000
- 80% lending would be against your owner-occupied property and 70% lending would be against your rental
- You would still need to meet the lender’s servicing guidelines, but this scenario illustrates how to work out your equity position.
We recommend discussing your options with your mortgage broker and getting a mortgage pre-approval before you go property shopping. Then you know what you can afford and be in a position to make a cash offer on the right one.
If you are a couple looking to invest in your first rental property, discuss your strategy upfront so that you have similar expectations. If one is more risk averse than the other, you can strategise to reduce that risk — look to buy in a desirable area so the property is easy to onsell should you need to. Consider engaging a property manager to look after your rental.
A big hurdle for people is finding the time to look for a potential property. Getting to open homes can eat into your personal or family time, but you don’t have to allocate every weekend for it. If time is an issue for you, be competitive with your offer strategy so you’re not wasting time making lots of low offers and missing out on suitable properties.