How do you turn your home into an investment property?
Today, you're going to find out exactly
how to pull equity out of your existing house and buy an investment property or a second home.
Let's get right in.
So before we get started, why would you even want to do this? What's a common example that you'd see in this situation?
Who does this, Nathan? Yeah typically, we see mums and dads
that have owned their home for anywhere from two, three, four plus years and, you know what, it's time to upgrade.
It's getting -- Yeah, it's getting a bit -- - Too many kids. Fire in the oven.
They're expecting another kid, they've owned their home for a little bit
and then equity in there that can be utilized to purchase the next property.
While it's always the hard thing when you've got an existing home and you want to buy a new one is juggling
-- doing that in between, do you get a bridging loan, which we've got another video on
-- or do you keep that existing house, you want to keep it and potentially, buy a new investment property
and you know what they say, it's sort of the longer you hold the property, it's not timing in the market
but time in the market so sometimes, holding that property a bit longer can make a lot of sense.
So Nathan, how do you actually go about doing this? If I have an existing house, I want to keep that house,
turn it into an investment property and buy a new one, how can I get deposit out of my existing house?
So I guess from the most basic examples is let's say your property is now worth $500,000
and you only owe $100,000. So you've done really well, you've paid down the loan.
Well, there's bucket loads of equity in the property. The equity is the value of the property less any loans owed.
So in this example, if you've got $400,000 of equity, the banks will allow you to leverage 80% of the property value,
which means 80% of $400k,
means that you've got a remaining equity balance of $300,000 once you've taken your existing loan away.
So that cash or equity can be used as leverage to purchase your next property.
So it's probably a little bit confusing, Jayden.
The most simplest way to understand is if you've got your property, it's increased in value,
there may be ways to utilize that so you don't have to put a deposit for your next time.
So yeah, I guess in short, you've got your existing home, you've got an existing loan against it,
you can then borrow a chunk of money from an existing house to go towards the new property.
What about the situation where my wife or partner might be pregnant?
We're might be on two incomes now, we might be down to one income
and we want to upgrade our home to keep the existing house.
What are some things you can do to think about cash flow and planning for that period
where she might be off work for six months?
So I think an important consideration is if you are going down to one income is having a buffer,
a bit of cash flow behind you, where it can cover you
in the instance where your wife or partner might be out of work for a period of time.
What this means is you can continue to keep your existing property and purchase the next property.
Another thing is also, preserving cashflow by looking at setting up the loan as potentially, interest-only on the investment,
whereby you can preserve the cash flow and continue to pay down your home.
Yes, so what Nathan's getting at there is being a bit organized.
So it's probably sitting down with your mortgage broker
or if you're really good at spreadsheets, you can count the numbers yourself and look at how much money's
going to be coming in when you're down to one income and again,
you might qualify for the paid parental leave, there might be other income in there
but understand what your inflow's going to be and also, what your costs are going to be
because, although you might go down from two incomes to one, you're going to still have two mortgages there,
so you still need to pay for that and work out what the difference is going to be.
If, for example, your inflows, you're making $2000 a month, your mortgages cost you $3000 a month,
it means you're going backwards, $8,000 a month while your partner's off and that's fine.
You just want to have enough buffer there, so if you're off for six months,
for example, you want to have, at least $6000 buffer there in your account to make sure
that you can manage your payments and everything else and you can really enjoy your time with the new baby
because you don't want to worry about your money during that period.
So next step, Nathan what if I want to upgrade my house and buy a new home, what if I want to upgrade my house
and keep this investment property, what if I want an upgrade of sorts, what can I do?
I think firstly, understand what your plans are -- if you're going to keep sell or upgrade, downgrade,
understand what your plans are, sit down with a mortgage broker and plan out what it might look like.
That way, you can start to understand the numbers, work around a new budget with what the expected repayments are.
Yeah, I think those are three numbers you want to look at there are: Is it possible?
Is there enough equity in your existing property that you can use as a deposit or do you have enough cash savings?
Number 2, which is even more important,
if you're looking at if you're pregnant or if you're going to go down to two incomes, is that cash flow thing.
So look at your income, look at what it's going to be over the next 12 months and see, can you actually afford it.
Although the bank might give you the money, it's a question of, "Do you want to be really stretched?"
So just make sure those two numbers are really important to understand and get right
and again, like Nathan said, talk to a mortgage broker who understands that
or check out some of it online, on our website at HunterGalloway.com.au.
So that's it for today guys. If you have any questions,
feel free to hit us up at HunterGalloway.com.au.
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