How to Buy An Investment Property With Home Equity (No Cash Required)

Ever wondered how people who’ve successfully invested in multiple properties do it? Two words: home equity.

Savvy investors know how home equity works and use it to buy properties without spending a dime on a cash deposit. You can use your property equity to grow your wealth over the years by five, ten, and even twenty-fold. There’s no limit and it’s less complicated than it seems.

Here’s how to turn your home or any property you own into a wealth-building machine.

Equity in real estate is the current market value of your property, less what you owe on it to the lender. If you have a $600,000 home and you owe $400,000, your equity is $200,000. In other words, equity is the ownership you have of your house or property.

Property equity is not just a tracker of how much left you have on your loan. It’s also an incredible asset that can be used to buy investments (such as other properties) and accumulate wealth over time.

Banks will typically lend you up to 80% of your home’s value minus what you owe on your mortgage. This is your useable equity. The bank holds the rest of the equity to mitigate risk in case house prices fall. That’s because they want to avoid a situation where a borrower owes more than the value of their property.

To be able to take out a loan on your home equity, you still need to prove that you can pay it off. It’s helpful to have a stable income stream and a property whose rental fee can cover the costs of the loan.

Over time, as your property increases in value, your equity increases as well. This allows you to borrow more and invest it in more properties and other assets.

When you buy your first home, you need to hand over a cash deposit. However, once you have a solid amount of equity built up in that home, the banks are more than happy to lend you your equity in one lump sum. This is called a home equity loan. You’ll be making monthly payments toward this loan, just as one does on their first property or home. You can think of it like a second mortgage.

The funds released from your home equity (which you borrowed from the bank) can then be used to fund the deposit on your second property.

The great thing about this is you aren’t starting from scratch each time. You’re using the funds you received from the bank to secure another property and grow your wealth without dipping into your cash reserves.

To see how this works, you can check the example below showing the potential equity growth of a $500,000 home with a 20% deposit and an estimated annual interest rate of 6.3% (how much the property’s value will increase year on year).

As the value of your property grows, so does your equity and in turn, the amount of money you can borrow. Through the magic of compounding, within a few years, you can take out a home equity loan large enough to purchase a second (investment) property. Here’s what that will look like.

In this example, the home initially valued at $500,000 at the time of purchase can potentially earn you over $10M of total wealth in 40 years. Your investment property accelerates your asset accumulation quickly, even when its initial valuation is just $500,000, well below the average property value in the Australian market.

Property investing is undoubtedly one of the best ways to grow one’s money and every mortgage holder can unlock it through the power of their home equity. We know that the property holds more value yearly and that the banks are willing to dole out home equity loans for aspiring investors.

Despite this, people get cold feet when they see how much they need to take on in debt to buy a second (or third or fourth) property. The fear is normal given the economic landscape and the interest hikes as of late but being led by this fear is making people miss out on the opportunity of a lifetime.

All investing comes with risk. To manage this risk, you need to have a good plan. This plan will help you stay the course and navigate the rocky periods every investor has to face. You need to consider when, how, and why you’re investing to build up the confidence you need to get started.

Property is a great investment vehicle that should be a part of everyone’s wealth-creation strategy. And thanks to home equity, real estate investments are within reach for every mortgage owner. As you can see in the examples, there’s serious earning potential in property investing and as long as borrowers know what they’re getting into, they can leverage equity without fear.