Are you a home owner looking to buy an investment property? You may be able to use the equity in your home as a deposit to buy the property, without using your own cash.
What is equity?
Equity is the portion of a property that you truly ‘own’. It’s the difference between the market value and the amount you still owe on it. For example, if your property was valued at $600,000 and you have debts of $400,000 then you would have $200,000 in equity.
Here are five ways you can begin to build more equity.
1. Do your research
Equity can build when the market value of your property increases. Before you buy any property, whether a home or an investment property, do your due diligence and favour an up-and-coming area likely to grow in popularity. It’s also important to consider whether the location of the property is close to amenities like public transport, schools and shopping centres, as this will affect property values.
BMT Tax Depreciation has developed an online portal, MyBMT, which helps property buyers make informed decisions. The new research and insights tab helps you to learn more about the area in which a property is located, to discover newly listed properties in the area and see important metrics such as recent census data.
This information can assist the decision of whether to buy a property. The research and insights tab also informs you of any lodged planning applications and new developments in the area so there are no surprises after purchase that could decrease the property’s value.
Making upgrades and renovations can boost the market value of your home, but it’s important to avoid overcapitalising.
Updating kitchens and bathrooms, improving landscaping and making the home more energy-efficient can all pay off. However, those projects cost money up front and you need to be confident that you can recoup the costs.
If you’re making improvements mainly to build equity, pick projects with the highest return on investment. Read about how a renovation achieved a 13 per cent yield here.
Get a feel for how much your proposed renovation will cost by collecting quotes and speaking to others in your area who have recently renovated. It’s also important to be consistent with the property’s upkeep. Routine maintenance is tedious and costs money, but a home that’s falling apart is not appealing. If you fail to address maintenance issues like leaks and deteriorating roofing, your home equity may begin to decrease over time.
Keep in mind that any renovations which are completed to investment properties should increase your depreciation claim for eligible items, which in turn will reduce your tax bill. You may also be eligible to ‘scrap’ any assets you’ve removed during renovations.
For a free estimate of the likely depreciation deductions you could be claiming from your investment property renovation, contact the expert team at BMT.
3. Reduce debt
By lowering your mortgage you are effectively increasing your equity in that property. Even if you have a thirty-year mortgage, you can speed things up by paying extra. Each additional dollar you pay above your required monthly payment reduces your debt and can add to your equity.
If you are making mortgage repayments on a monthly basis, consider changing your repayments to fortnightly. Generally, the more often you’re paying funds onto your loan, the less interest you will pay overall. This is because the loan balance is constantly reducing.
4. Get your property revalued
Getting your property revalued when markets are high can give you more equity. If your property has gone up in value, it’s worth getting your property revalued because you could use that extra equity to reinvest.
5. The benefits of equity – more properties
Equity makes it possible for property investors to refinance a loan and access funds to use as a deposit to buy other properties. The more properties you have, the more equity you could potentially build, as the value of the properties goes up and the tenants pay off your loans.
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