Did you know you can use the equity in your home to buy multiple properties? Many are unaware of this powerful investment strategy. In this article, I’ll explain how you can leverage the equity from one property to finance additional purchases, accelerating the growth of your property portfolio. Keep reading to learn how to maximise your returns and achieve your investment goals faster.
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Did you know that you can use equity in one house, including your residence, to purchase multiple properties by using it as a deposit?
Most people are unaware of this strategy and how it works.
In this article, I will explain how you can use equity from one home as multiple deposits, building your property portfolio even faster.
So keep reading…
Now, the whole idea of growing a property portfolio is to achieve the highest return on investment.
You may ask yourself: How do I get the maximum return on my investment or cash? If I use a dollar, how do I maximise the return on that single dollar?
One effective strategy is to use that dollar and invest in property where you can then benefit from the appreciation of the price of that property, and use that dollar to continue to build out your portfolio.
The expectation with real estate is equity builds, and then you would use that equity to make additional purchases. But effectively, you only used $1 to initiate this process.
So, I'm going to share with you exactly how that works in a second.
Traditionally, to get us this lovely home in a nice suburb, we've all been taught to buy a property with:
- 20% deposit
- 80% loan
However, let’s look at this differently with a $450,000 house as an example.
I want to focus on an investment property because that's what we specialise in at Search Property. If you're interested in building your wealth in real estate and doing it with speed, expertise, and data without having to do all the work, then definitely contact my team.
Now, looking at the photo below, we have:
So that would be: $90,000.
The costs would work out to be about: $20,000
Having a 20% deposit means that you would need about: $110,000.
Now, you might look at your bank account and go: “I don't have $110,000,” which means, “I can't buy a $450,000 home.”
That's why we need to look at alternative solutions as above is the old way of doing things. *Looking at this reminds me of people who would prefer to walk when they have a car.*
Now, apart from the health benefits, you're looking at TIME as your biggest asset. *Of course, you'll drive there, and it will be faster than walking 35 km.*
So, back to the whiteboard, let's stick to the numbers now. How would you go about buying five properties?
Here we have our first option, which is to simply:
Yeah, half a million dollars. Good luck.
Our second option is to use equity, and I will show you exactly what that means.
Now, let’s tackle option one. Let’s say, during the first year you’ll do the following:
Now, in year 4, what you would do is:
You would be looking at properties, and the lowest you can find a property is about $500,000.
As you can see in this option, you will save money and then do it again, save and do it again. You will live a very frugal life. However, to keep and save $110,000 is no easy task. It slows down your entire process and might take you ten years just to purchase three or four properties.
If we look at the alternative solution, which is using equity, I will show you exactly how you could do this process much faster. For example:
This would account for your deposit as well as some extra fees because you're using a 10% deposit instead of a 20% deposit. You then purchase your first property for $450,000.
If you've made wise purchases, as we frequently do with our clients, you'll find yourself: Needing to save $30,000 after 9 to 12 months.
The remaining funds will come from the equity gained in the first property, potentially enabling you to: Buy another property worth $450,000 within the same year.
In this scenario, we only need the deposit for one house. After purchasing that property and witnessing its appreciation in value, coupled with my ongoing savings efforts, my asset base could potentially reach up to: $900,000 within 12 months.
Now, we repeat the process, which is incredibly powerful. I'll demonstrate precisely how you can leverage this method to expand your property portfolio. Using option two, we can purchase two properties in year one. Here's how it works:
For a property valued at $450k:
If I use the Search Property Buyers agency, I'm likely acquiring this property at: Around $12,000 to $15,000 under market value.
Now, this depends on how competitive the market is. Purchasing properties in Perth, for example, is currently extremely challenging. That's why we're predominantly focusing on off-market opportunities in those regions.
On average, we're seeing growth rates of about 12% to 13%.
After about 12 months, the property's value typically increases by around $56,000 from its purchase price. As a result, securing the next deposit becomes much more feasible because of the equity gained from the first property.
Now, let's differentiate between usable equity and equity.
Many individuals believe it's simply the “new value minus the old value” that they can utilise. However, banks typically don't provide a loan for the entire equity amount; they typically offer a 90% loan.
Here's how it works:
This results in an LVR position of about 78%.
So what we would do is the new value multiplied by 90% equals this number —- $466,194, which is going to be the new loan.
If we wished to top up our loan or refinance it with another bank, we could potentially secure a loan at 90%.
So the calculation would be: The new property value multiplied by 90%,
This results in this figure—$466,194, which would represent the new loan amount.
Now, what you can do is subtract the old loan from the new loan, which amounts to: $61,194
The necessary funds to purchase another property would be: $75,000
In this case, $61,000 is obtained directly from the equity, leaving us to cover only $13,805 from our pocket.
This is easier than saving an additional $75,000. So, in 12 months with option one, we have: A property worth $481,500.
Take note: we only own one property.
Now, the total outlay is: $110,000,
And the growth is about: $33,705.
Meanwhile, if we opt for option two, we're likely in a position where we: Own two properties worth a total of about $967,000.
Our total cash outlay is only $88,805, which is the cash we've saved up ourselves. With a growth rate of about 12%, which is what we averaged at Search Property while the market was fluctuating, the return would be: Around $117,320.
Now, if you compare option one, which is what most people do, versus option two, you're achieving a return that's almost 3.48 times greater than usual.
And this is how many people build their property portfolio to 5, 10, or even 15 properties. It is the same strategy I use for my properties to build out my portfolio.
Now, I'm in a position where my portfolio is so extensive that it generates significant equity every year. With this equity, I can acquire another four, five, or even six properties without investing a single dollar of my own.
Of course, having the borrowing capacity is important for this strategy, which is why getting the right team is essential.
To recap:
1. You need properties that will appreciate in value; otherwise, the strategy won't work.
2. You need a mortgage broker who can execute this plan with you.
If you need assistance with any of this, feel free to visit Search Property and schedule a free Discovery call with our team. We're here to help.
I hope you've enjoyed this article.
Until next time!
Thank you, everyone!
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