Guest Post: Andrew enjoys blogging about finance and investment. Over the last 5 years is has written numerous posts and has been featured in prominent finance blogs. Andrew is also a regular contributor at australianlendingcentre.com.au, where he writes monthly updates.
In the past, it was possible for investors to obtain full financing when buying real estate. These days, loan providers have become more stringent to reduce their exposure to risk. It is common to be required to pay a down payment of about 20% to 25% just to secure financing, not even including closing fees, leasing charges, repair expenses, and others.
You can take advantage of your current home equity and use it to easily and quickly obtain financing. Any lender would prefer to take a form of security for your loan. In return, you could obtain a lower interest rate and better terms. Plus, you may not have to doubt whether your loan application would be approved.
While many homeowners consider it a taboo to borrow money against home equity, you should look at the brighter prospects of doing so. Your home equity could be used to obtain higher returns. Who would disagree that it is much better to use home equity as a tool for investment instead of as a vehicle for consumption?
Your home equity can be used to generate cash flow, which can be used for making investments. Why let it sit comfortably without any use? You can strategically use it to further grow your property portfolio or investment. You may also use the amount to take other types of lucrative investments.
Earning higher interest
While credit markets remain tight and home valuations are still lower, take the opportunity to borrow using your home equity. It is simply cheaper to borrow to generate cash that could be used for investing in real estate. Higher returns from leveraged property investments could provide higher net returns.
To illustrate, suppose you obtained a $20,000 loan using your home equity as collateral with a 4% annual interest rate. You may use the entire amount as down payment to acquire a property worth $100,000. If the purchased real estate could be rented out at $300 monthly, it would generate $3,600 for a year. That translates to an 18% annual interest compared to a 4% interest of the loan. Thus, you would get a 14% return on investment.
Moreover, the acquired property could further appreciate. Getting back on the example, if the real estate market appreciates at 2% annually, your $100,000 property would grow by $2,000 in value in a year. Thus, in its first year, your total gain would be $2,000 plus $3,600 as rental income. In that year, net return would rise to 24%.
Anyone would surely agree that it is prudent to earn 24% using a part of your home equity. That is better than just doing nothing with that equity. Through maximising accessibility of your home equity and leveraging it to purchase another real estate, you could continuously build greater wealth in the long run especially if you would keep on doing it cyclically.