How to calculate the equity you can actually borrow against to buy more properties. A $1 million property with $500k debt and an 80% loan-to-value ratio gives you $300k to work with. Banks set LVR limits based on property type and location, and some require proof of a new purchase before they'll release the cash.
What I want to talk to you guys about is all about how to utilize and access your equity and how you use your equity to supercharge your portfolio. Now, I actually ran a Facebook Live in this Wealth Dojo group on this similar type of topic quite recently. But some of you saw it, some of you did not. And I wanted to make sure that I'm doing this with you guys as well, because this is such a critical element when it comes to growing a portfolio. So your total equity is simply your value minus your debt. That's what it is. Okay, so it's value minus debt. And so your total equity in this situation is going to be $500,000. Now, that doesn't mean the banks are going to take into consideration, allow you to access the entire amount of debt. So your next thing you need to ask yourself is, what's the accessible equity? Now, what are the typical loan-to-value ratios that you're going to be able to access when it comes to growing, to access equity in property? What's pretty typical? Yeah, Brad's gone and done it already. It's an 80% loan-to-value ratio. Or a 90% loan-to-value ratio is what's typical. Sometimes you can get 95%. Yeah, Belinda found out that we are in a postcode where they'll only give us 75%. So I, many of you know that we bought a rainforest about 18 months ago now. What loan-to-value ratio do you think we were, the maximum LVR we were going to be able to get? Given that we bought a rainforest. Yeah, it was 70% loan-to-value ratio. So there's lots of factors going to impact what type of LVR that you can get. It's a certain suburb, it is the size of the property. So anything over 10 acres— sorry, 5 acres for most lenders will automatically put it in a sub-80% category, right? Anything— if you buy a property under 50 square meters, Do you think a bank's gonna generally give you 90%? Yeah. So yeah. So the reason why is because when a bank is lending you money, they are making an investment into you. So they're saying, if you stuff up, how am I gonna get my capital back out again? That's what they're asking the question around. So how easy is it to sell is what Belinda just mentioned there. Okay, now if you buy a unit under 50 square meters, do you think the bank's giving you a 90% LVR or not in general? No. No, it's not, right? They generally won't give you a 90% LVR under 50 square meters in a unit because it's very small. It's more considered a studio style of property. Okay, now same with holiday accommodation. resort-style accommodation, student accommodation, they're going to lower the loan-to-value ratios because it's harder for them to sell if you stuff up. Is that making sense, everybody? So they'll— and now if it's a standard residential piece of real estate in a good quality area, then they're going to give you relatively solid LVRs if it's a standard type of property. Okay, but it's going to change. Now, if we did an 80% loan-to-value ratio, On this property, how we do the math on this is that we take the value. So accessible equity is value times LVR minus debt. That's the formula. So in this situation, we're going to take one million. We times it by LVR, which is eighty percent. So that's going to give us up to $800,000, and then we're going to minus our debt, which is $500K, and that is going to give us an accessible equity amount of $300,000. Is everyone with me so far? So we can go draw out $300,000 potentially in cash. Now, will every bank allow you to draw it out in cash? No, they won't. Okay, so some banks— yeah, so, so now this is putting servicing aside. Forget about servicing. We're going to get that and talk about that in a moment. But what some banks will do is that they're not going to give you cash out. What they will do is that, no, we'll only give you the loan if you bring us another property that you want to buy. You bring us the contract and show us that you're actually putting us into a property deal. and then it's only then will we give you the cash. Other times you need to get a statement of advice by a financial planner. Now, if you ever get asked for that type of stuff by a bank, I'd be sitting there going, I'm with the wrong bank. Okay? The reason is, is because liquidity is one of the key ingredients to a successful portfolio. So you can choose the type of deals you want to do, not what the bank thinks is a good deal. Okay? That's what one of the key is. So we always wanna be maximizing our liquidity when it comes to growing out a portfolio.
