How to use Equity to buy a Property?
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- เผยแพร่เมื่อ 18 มี.ค. 2022
- Equity Harvesting or Cash out Refinance. We breakdown the jargon and provide an example on how you can refinance your first property to buy a second. Leave a like if you found this topic helpful!
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Thank you for the great video. Could you give some info on the application procedure, such as (i) documentation needed - how many months of salary slips and other documents needed, and (ii) how long does it take the bank to process the application for cash out equity release?
I'd be interested in a video outlining your opinion on property investing vs stocks. Particularily interested in your thoughts comparing manufacted value/cashout refi in property investing vs the benefits that come with stock investing
Great feedback! I'll have a look at breaking down this topic in a future video
What about the implications for cash flow. Do you assume each property is positively geared otherwise yes you can get debt but can you service it? Am I missing something?
Yes you'd need to service using your own income (negative gearing) or with positive cash flow property
I like your work. Can you pls help with a new vlog on when you reach borrowing limits how this snow ball works? What is the optimum rental return needed to continue this snowball effect?
For sure. Similar to one of the other comments under this video! Looks like a chat around optimising rental returns / serviceability will need to be a topic I cover soon!
Great useful information
After about 3-4 investment properties you will start to reach your maximum borrowing limit, unless you can find additional cash flow from somewhere else. Even with the positive gearing properties (with good rental incomes) when the banks calculate your rental income they only take 80% of your total rental income. This is to leave them a variation buffer. So even if you can draw down equity from valuation to get deposit for your next property you can’t get the loan anymore as you reach your limit.
That's what I thought too.
I absolutely agree with you that unless you have large and growing personal income you will not be able to obtain more and more debt at some point.
Wouldn't 3 to 4 properties be enough for the average family? To create a portfolio that gives them choices. Start with Big banks the move to non-bank lenders.
The average Aussie struggles to buy 1 investment property, and get to numbers 2, 3 & 4! This video really focuses on how to go from your first investment, pull out equity and buy your 2nd
@@lukewiles1 Yes. I agree with you. but what I wanted to say was even with just one property if you have max out your borrowing with just one property then u wont be able to borrow more to get the second one, unless there is additional income that can service that loan. Yes equity can be drawn for deposit but without that additional income to service the bigger loan u can’t do anything. Back in the days was a lot easier because the banks were not that strict on borrowing but now days it’s much tougher. Unless u find a positive cash flow property that is >20% more than the mortgage repayment, which is rare these days.
@@noaha2334 fair point! There would be some people in that exact situation. If your net income was that low you'd have to make sure your first property was circa 6% yield or higher to maximise your net income for future servicing. Plus focus on improving your day job income for a short time (common example is work in the mines for a year)
All not easy with tighter lending we have these days!
@@lukewiles1 I mean, it makes sense for lending practice to be made tighter. Otherwise, more and more people would just speculate on residential real estate (which is non-productive by nature) using excessive leverage, which puts both both the lender and the borrower in a precarious position.
Does it mean the total loan for 2 houses would be $800k?
Wouldn't the overall debt in your portfolio be 'snowballing' as well if you keep taking on top-up loans for down payment for the next property?
Yes definitely the debt will be increasing at the same rate & ratio as your portfolio is expanding (& continue to cash out refi)
However it creates economy of scale. 20% of 500k portfolio is $100k Equity. 20% of $5m Portfolio is 1m Equity. The idea is to create a bigger portfolio, then pay down debt (i.e. Accumulation first then Consolidation)
@@lukewiles1 But the example you provide (that is, buying a second property for $500k using $80k top up loan/cash out refi from the first property and $20k saving to cover the 20% down payment) shows that effectively only 4% ($20k) of the purchase price is financed by your own money. If this approach is repeated again and again, wouldn't the overall debt in your portfolio eventually outpace the equity (or your net wealth, if you will) component in it?
In any case, wouldn't the lender ask the source of your down payment when assessing your loan application for the second property (plus other variables like your income to calculate your debt-to-income ratio, etc.)? If they find out 80% of the down payment for the second property is financed by debt, how likely is it that they would be willing to extend the loan to finance the remaining 80% of the purchase price knowing less than 5% of the purchase price would be covered by your own genuine savings?
@@uberboiz This strategy works only if the property you buy appreciates in value. Appreciation can be achieved by spending "time in the market", where demand is greater than supply or manufacturing value through undertaking renovations.
You can rinse & repeat this strategy as long as you have the serviceability & capital (either equity refi or cash) to fund another purchase. You have to disclose to new or current lenders that your debt level has increased to access cash & the banks will asses your Debt to Income Ratio & serviceability. Note that the new property purchased will bring in rental income which will help boost serviceability too.
This video is really focussed on the mechanics of just equity/cashout refinancing
is it better to take out the equity from principal place of residence or from investment property? what is your thought on this? many thanks!
P&I for owner occupied and interest only for investments is what we do!
Thanks Luke .
If we have 2 properties available - is it better to take the equity release from the owner occupied property or from the investment property?
@eph689 if its owner occupied, get a separate loan for investment purposes, so you can claim tax deductions for investment.
You can just top up the investment loan because it's all investment debt
Hey Luke, with the refi amount used for deposit - is it best to get that as a seperate loan?
The interest component of the 80k would be tax deductible if used for an investment property.
I found this out after I’d already done exactly this. Is there a way to still claim the interest on the refi amount? Or split the loan on property # 1 after the fact maybe. Just a bit tricky having them in the one loan and claiming the interest my accountant has mentioned.
Cheers man.
So who pays the 400k back on house number 2? if ppl had that kind of money to service both you would just pay out and ay off your house 1. An i cant imagine rent from house 2 would cover the 400k?
How many times can you take out equity in a property if its keeps on increasing value every 3-5 yrs, is there a limit?
There's no limit. The thing that stops most people is their ability to take on more debt due to their servicability
@@lukewiles1 yeah, that's another problem, 1million equity but no serviceability gets you stuck to 3-4 properties
Equity is not free money. You still need to pay the bank back. They will still assess your serviceability on that equity.
100% you're spot on
Elephant in the room but how do you now afford 2 sets of loan repayments? Hope rent covers it??
Yes
What about mortgage payments?
They'll increase based on your new debt levels
Hi @@lukewiles1if your 1st mortgage repayments increase, then you buy a 2nd property, how do you service the cost of the 2nd mortgage? Wouldn’t you need the rent to cover the 2nd mortgage AND your increased repayments on mortgage 1? Is that realistic? Would love to see a cash flow example showing how this works
Hey u said take equity as cash ?? 🤔🤔🤔
All other TH-cam video says that u take a new loan based on ur equity . That means, if u want to buy 480k house
U take loan : 400k
And taken another LOAN of 80k ( which is ur equity)
So total loan is 480k !!!!!
But where is the cash here ? 🤔🤔🤔
There's two sides in accounting... if you increase your debt (ie CR Liability) then the other side is to increase cash (DR Cash) or increase assets (DR Investment Property). So if you draw a new loan of $80k you can receive this in cash or it can be immediately secured against your new property purchase as a deposit