Finding your deposit
There is more than one way to finance your deposit.
The good old…save a deposit: The most simple and straightforward method of making a property purchase is to save a deposit.
Use the equity in your home/other property: If you are already repaying your own home or have an investment property, you may have enough equity to use as a deposit for your next property purchase.
Self managed super fund (SMSF): Changes to superannuation legislation have made it possible for your SMSF to borrow to invest in real estate.
Using the existing equity from your home to buy your investment property
Many Australians are now tapping into their ‘pot of gold’ – the equity in their home – allowing them to invest for the future and forge ahead financially. Tapping into your home equity (or equity from another investment property) is a great launching platform for buying an investment property. If you are already repaying a property, you may be able to use the equity you have built up to purchase an additional property. Let’s use an example to explain this process.
Your lender is going to require that the loan amount is less than 80% of the value of the property unless you are willing to pay lender’s mortgage insurance (LMI), so to keep things simple we will assume that you can only borrow 80%. From our example below, you have $250,000 available in your home loan that could be used to purchase an investment property.
You have two different options available in terms of structuring your loans:
- Establish a line of credit, or
- Apply for a standard term loan with a redraw facility or an offset account where the remaining equity will sit until required.
Let’s now assume that you purchase an investment property worth $500,000. You again want to avoid LMI so you will need to provide $100,000 as a deposit. You also need to consider the upfront purchase costs. These vary from state to state so we will assume 5% of the total purchase price (or $25,000). This means you will need to provide $125,000 from the equity in your first property.
Your tenants and the tax man (through rebates) help pay for the new loan, however sometimes there could be a shortfall to be serviced. This should be taken into account when borrowing to ensure that the loan on the new investment property and your existing property can be serviced within your budget. A margin should be included for any interest rate rises. Then all you need to do is sit back and let the property market take its course. The last century has shown, even in the tough times, that capital gains generate additional equity every seven to ten years.
Buying an investment property through a superannuation fund
Did you know that you can use your self managed superannuation fund to buy an investment property?
You will need to consult your accountant or financial advisor with regards to:
- what you can and cannot do in a self managed super fund (SMSF),
- benefits of using an SMSF to buy a property,
- challenges and pitfalls,
- using the correct trust structures,
- how to correctly source and set up the finance, and
- how to buy an investment property through a superannuation fund.