This is a question we get asked quite often. When your home has gained value and you are reducing your debt every month, you can quickly find yourself with a lot of equity in your home. Should you use this to invest in more property?
It may be possible to access some of this equity to invest (keeping in mind that repaying your mortgage is the safest and least risky investment you can make). The answer to the question will come down to your investor profile, and your current financial commitments.
What is my long-term financial plan? Investing in the property is not an objective in itself. It’s a way to help you reach your money goals, and it may not be the best way for you.
The average Kiwi real estate investor starts using the equity in his house to buy his first rental property. Could it work for you?
Jody is an authorized financial advisor and can suggest long-term financial goals that suit your needs, then think about how to achieve them. If the property suits your plan, using your equity to buy a rental could be the right choice for you.
What is your appetite for risk? Jody says she has sometimes seen inexperienced investors buy their first rental then spend sleepless nights worrying about their tenants and their property, and then bailing out three years later, panicked, without earning a buck. If the margins of the investment are down the wire then it may not be worth it, as a single missed rent payment or an unexpected emergency could topple you.
If you are not inclined to take risks, an installation in an inexpensive area may not be your best choice. Instead, you may prefer to pay more for a new build and employ a property manager. Or you may prefer to avoid all the stress and just repay your own mortgage.
Do you know how to structure your properties? We can recommend an accountant before buying a rental. Good advice on structuring your loans and accounts can save you a lot of money and help you repay your mortgage faster.
Another consideration you need to ask yourself is are you ready to use your home as security? Let’s say you have a million dollar house with a $900,000 loan. Provided your income supports the larger loan, you could borrow up to 80% of the value of your home.
This means that you can potentially borrow an additional $ 100,000 from your home as a deposit in an investment property.
Investment properties currently require a down payment of 30%. With $ 100,000, you could therefore spend up to $ 333,000 on renting (again, assuming you and the property meet the loan criteria).
“You have to be able to accept the risks, think long-term and have a plan. This is not a quick enrichment ploy, but ownership can be a great way to secure your financial future. ”
The best thing to do is come in for a chat with us. We work with a range of professional, and can help you get your foot correctly on the property ladder. You can find out more about our services here.