The Ultimate Guide To Renovation Course - Module 11: Accessing the Equity

Accessing the equity. If you have a property in which you have equity, you'll be able, within certain conditions, to secure equity. For now, we'll assume that you can do this through the traditional way, which is a line of credit or LOC on this property. A line of credit is a facility where you can draw out some money from the property as you need it, but not all of it. Essentially, it's like a big credit card, you only pay for what you use. First, you need to get the bank to agree that you can afford another loan against your property, albeit a rental property or your home. I like to keep this as a separate loan facility as the purpose of this new money is often to build my portfolio, ie, the next purchase. So I want to keep the interest on these funds separate to the interest charge on the original loan. As at tax time, it's easier to attribute the interest to the actual property that it's doing work for, not the property that it's secured against. Let's say that the bank agrees to give you a $100,000 line of credit. If you draw out $40,000 to buy a property, you only pay interest on the $40,000. Now, be careful. Many a person has been tempted and used this line of credit as a big credit card and bought cars and holidays. You must be disciplined and if this is for investment purposes, then keep it. So as a tip, if you do need funds for personal debt, then split this loan or get a new one. You should keep personal, that is non deductible debt and deductible debt, that is investment debt. Separate. This line of credit becomes the tool you need to utilise if you don't want to use your savings, rather keeping them as a buffer if you want to continue your property investing career. Debt management, the creation of money out of thin air is not to be taken lightly. After all, a line of credit is still debt and all the rules of good debt management apply. For example, I always suggest drawing down on about a maximum of, say 80% of the line of credit in order to have a buffer in case of emergencies and draw funds and use it for investing immediately. This risk minimisation strategy means if you do run into trouble, I.e. extended rental vacancies, losing your job, etc. You have the funds to keep the property whilst you work out what to do. A buffer is a risk minimisation strategy everyone should consider, especially if you don't have a buffer of cash at your disposal. Literally millions of Australians have made money in real estate, more so over the last 10 to 12 years, and I expect many more to make even more money in the years to come. Many will not have had spare cash just laying around. Most of them have made their money by leveraging equity. If the value of an investment property goes up and the mortgage on it stays constant, your equity or net worth increases. Basically, the high degree of leverage on residential property allows you to build wealth by using just a little of your own money and quite a lot of other people's money. Remember, I wrote a book on this. With just two investment properties and one renovation, you can put a million dollars in the bank. So let's talk about bank confidence in residential property. Despite the credit squeeze that the bank supplied to the mortgage lending market since the global financial crisis, banks were still lending to investors, albeit with a few extra hurdles. The bank's confidence in residential property allows you to use your increased equity as security. But there is some work to be done before the bank offers you the additional line of credit. Equity grows. For most homeowners, the thought of paying interest on a new loan and adding yet another bill to the stack keeps them from utilising the home equity. I, however, look at this differently and in fact I believe that the most people are sitting on an untapped gold mine. Once you've tapped into your home's equity to purchase property 1, 2 or 3, depending on how much equity and servicing capacity you have, you you could actually tap into the equity in those properties to then secure more as well. Obviously, you need to be comfortable with your level of debt so that lending does not just continue without censure. This is usually provided by the bank's servicing requirements in any case, so that's how much they think you can actually afford. As your investment portfolio grows, often what you find is your understanding of risk. And risk management allows you to start feeling more comfortable with the debt you have, because you'll have mechanisms and buffers in place. At some stage, you will come up against a natural limit to your borrowing, which is determined by the bank's cautious lending policies. At this point, I know it seems a long way off, but if you decide to grow your portfolio, it will probably happen to you. There are strategies that allow you to maximise your borrowing capacity. The key though, is starting with the right lender with the right policies to suit your strategy at the outset.