Many home owners don’t realise they can simultaneously invest in another property and improve their cash flow, using equity in their house or apartment writes Richard Sheppard.
It’s an all-too-familiar scenario.
A couple with several children temporarily struggling with cash-flow – they have a principal and interest home loan with 20 years of repayments left, two car leases and credit card debt. What they often don’t realise though, is the power of the $750,000 of lazy equity sitting in their $1.5 million home. But with the help of an experienced Property Advisor, they could use that equity to dramatically turn things around.
- The couple’s existing property is valued at $1.5 million (of which they owe $750,000)
- A bank lends them up to 80 per cent of the $1.5 million valuation; that’s $1.2 million
- Taking away the $750,000 the couple owes on the property, they now have $450,000 of ‘spare equity’ set up as a second loan
- The $450,000 interest only-loan has a redraw facility (or alternatively an offset account) and $100,000 is allocated as a personal buffer in the event of unforeseen financial circumstances. They also put $100,000 in a separate offset account for an investment buffer. No interest is payable on these accounts
- That leaves $250,000 to cover the 20 per cent deposit and costs for a $1 million cash flow positive investment property
The end result
Using this strategy, the couple extend their home loan to 30 years (triggering much lower repayments) and negotiate a lower interest rate. They buy an investment property with strong rental returns that delivers a cash surplus of $200 a week after all ongoing costs. This, combined with using $40,000 of the personal buffer to pay out their leases, improves their weekly cash flow by $500 a week in total – all whilst their investment property delivers them around $100,000 a year in capital growth!
And with less risk…
Such a case dispels the notion that equity-rich property owners still need cash to transform their finances. They can also use that equity to minimise risk with a financial buffer.
Targeting growth areas using careful research through a trusted and reputable Advisor, such investors can buy a property where the rent and tax benefits cover all the loan repayments and costs. Their cash flow improves and they set themselves up financially for life.
And remember, this strategy does not require investors stumping up any cash. Equity does the heavy lifting!
Important Note and Warning: This information is general in nature and should not be considered personal tax advice. We highly recommend you discuss these concepts with your accountant, property investment adviser and investment finance mortgage broker jointly to ensure any considered concepts are suitable for your personal financial situation, as one effect of the concept may negatively impact another part of your plan.