How To Use Equity To Purchase An Investment Property
Without a doubt, an investor’s secret weapon to building a profitable property portfolio is their ability to use equity.
This is because the one thing we need as property investors, particularly in the acquisition phase of our journey, is access to our money.
The more cash we can lay our hands on, the more properties we can buy and start to get an income from.
The good news is, during 2020 and 2021 bucket-loads of equity was generated for New Zealand homeowners as real estate across the country rose at a rapid speed. In fact, almost every man and his dog in NZ who owns property now, has gained a lot of wealth on paper through equity because of how quickly values have risen.
So, if this is you the best thing you can be doing to capitalise on this position is to now use equity to create future wealth through real estate.
But first, let’s cover the basics…
WHAT IS EQUITY?
Equity happens when your property is worth more than you paid for it. Maybe the average area price has gone up thanks to an improvement in local infrastructure, or there’s a lack of stock so people suddenly need to pay more to live in your location.
Or it could be from a major growth period like what we’ve experienced over the last couple of years.
Whatever the reason, your property is now worth more than you spent buying it.
Capital growth on a property can quite easily give us the warm and fuzzies. It’s great to swan around feeling smug that your $450,000 apartment would now sell for $500,000. But unless you do something about it, how does it really serve you?
To use equity, is the one financial tactic that a property investor needs to know how to use to grow their portfolio faster.
HOW TO USE EQUITY TO PURCHASE PROPERTY?
Once your property has equity, the smart thing to do (making sure you can still service the loan) is to revalue the property and draw out the increased amount. Property investors then use that cash as a deposit on the next one or two properties, which also yield rent income and capital growth.
Most property investors don’t start out their journey with a big bucket of cash that never empties. The majority of property investors need to borrow money from banks and lenders to get enough cash to buy that first investment.
And the quickest way to buy the next property is to have our first investment pay us back what we borrowed to buy it. In short, we want our properties to pay us back the deposit amount so we can use that money as the next deposit.
The equity equation can begin very early on. In fact, in a perfect world, you’ll buy a property with equity already in it.
Most people who have purchased or held property over the last few years now have a healthy stash of equity and now is the time to put it to work!
CAN YOU LOSE EQUITY?
Ever heard the saying, ‘If you don’t use it, you’ll lose it?’ – this could not be truer when it comes to equity. Just because you have it today, doesn’t mean that it will be there tomorrow.
Markets are constantly changing. Over the 20 years that you own a property you can expect the value to go up, go down and plateau. That’s how real estate works.
Property investors don’t live on capital growth. The income from rent and regular increases in that rent is what allows people to work a three day week. The more properties you own, the greater the passive income.
To use equity instead of just letting it sit there and do nothing, means you can buy a second, third or fourth property that much faster, which equates to more passive income.
MARKET CONSIDERATIONS WHEN USING EQUITY
If you’ve owned real estate before, you’ll probably understand that the property market changes all of the time.
Over the last 12 to 24 months the New Zealand property market has seen a range of unique conditions unfold. Everything from exuberant growth right across the country, to stricter lending laws taking place and now the rising of interest rates.
Rising interest rates are not uncommon, and in fact are a normal part of property market cycles. The issue right now, is that many people who currently hold property (or plan to), are not familiar with increases because we haven’t seen them in New Zealand for the last seven years.
And it isn’t just interest rates that are sending people into a stir, with the crackdown of banks now demanding higher deposits. Very few will entertain lending to someone who doesn’t have a minimum 20 percent deposit. Now that’s a pretty hefty blow for buyers hoping to get a foot in the door with a flexible 10 or 15 percent.
The problem now is that while many homeowners are sitting on a massive pile of equity, going down the traditional route of using it is becoming harder due to the current market landscape.
WHEN IS THE BEST TIME TO USE EQUITY?
But does that mean you have no options? Absolutely not! The best thing to do is pursue other ways to use that equity to continue to invest in property, and there’s a very important reason why.
You won’t make money on a property that you didn’t buy.
There’s never a right time to purchase real estate – you’ll always find a reason to sit on the side-line if you choose to.
The problem with this is, while you’re sitting there hoping for a halt in property prices, interest rates to go down or the bank to get more flexible with borrowing conditions – the exact opposite is happening.
Now not only are you losing potential capital growth and the ability to use equity by not buying today and gaining more value on your property tomorrow, the longer you wait, the more you’ll pay to enter into the market.
Last year alone we saw around 20 percent growth (some areas more than others).
Not acting in the hopes that the market will change to suit your circumstances is wishful thinking that will cause you to lose out on huge gains. The best time to buy (with the right investment strategy) is today.
I HAVE EQUITY BUT MY BANK HAS DECLINED FINANCE – WHAT NEXT?
We’ve established that there’s probably more equity in the NZ market right now than ever before. We’ve also established that the best thing that property investors can do to create future wealth is use it!
But what if you’re trying to use equity and have been declined by one of the big banks due to the current tight lending restrictions?
The number one issue we’re seeing property investors run into right now, is not that they don’t have the capital to reinvest – it’s strict lending laws and rising interest rates that are limiting people’s ability to tap into their capital.
Accessing money from a traditional bank is becoming harder, and it’s becoming more expensive too. But there’s one major opportunity available to property investors at the moment that could change the game completely – it’s called second-tier lending.
For a full breakdown of what second-tier lending is and how you can take advantage of it, read this article.
Under the Reserve Bank all of the main banks are governed by specific regulations and have rules that they must adhere to. Also, because they are influenced by the Reserve Bank, they all follow the leader when it comes to the rise and fall of interest rates.
However, second-tier lenders are different. They are not controlled by these same regulations and therefore have a lot more flexibility in who they can lend to. Building societies and credit unions are classified as second-tier lenders – they are basically non-bank lenders.
These loan providers do however still have to follow responsible lending laws.
Compared to the screens of information the main banks are looking at, a non-bank lender requires very little personal information. Generally speaking, they won’t comb through three months’ worth of bank statements and check every single transaction record.
On top of this, many are now bringing out some competitive products that could change the game for investors!
For example, one of the second-tier lenders is now doing a 20-year interest-only offer which is pretty much unheard of.
If you’ve got equity and have been declined finance from one of the bigger banks, then looking into second-tier lending could be just the ticket to growing your property portfolio.
HOW TO PUT TOGETHER AN EQUITY PLAN
Let the experts at Positive Real Estate teach you about how you can use equity to grow your property portfolio at one of our free property investing seminars.
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Book your spot now and find out what you need to know about the current market landscape and how you can make it work for the ultimate wealth creation opportunities.
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