How to Best Use Your Equity for Investing and Renovations

As a property investor, equity is the key to your long term success. It reflects the increasing value of your portfolio and will make up a significant proportion of your returns. It can also help fund further growth of your portfolio, either through renovating your existing properties or buying new ones.

But exactly how do you use your existing equity to boost your portfolio growth? And how do you make sure you are getting the best possible return from this reinvestment?

How is equity calculated?

Put simply, equity is the share of a property’s value that you own. It is essentially the difference between the market value of a property and the amount owing on it. For example, if a property is valued at $650,000 and you still owe $400,000 on it, your equity is $250,000.

In a completely flat market, if you make principal and interest repayments, your equity should increase over time. This is because you are slowly chipping away at the amount owing and steadily increasing your share in the property.

Your equity will also increase when the market is strong, and the value of your property grows. Similarly, you can attempt to actively increase your equity by updating, renovating, or extending a property.

Unlocking equity

Once you have built additional equity in a property, you can leverage it to fund further growth of your investments. But first you need to extract this value from your property. There are a few ways to do this, including:

• Refinancing the property, increasing the mortgage amount to the maximum, effectively releasing your existing equity.
• Purchasing another investment property and using your existing equity as security for the additional mortgage.
• Establishing a line of credit and using your existing equity as security.

It is important to note here that the only way to access all your equity is to sell the property. This is because most mortgage providers will only allow a loan-to-mortgage ratio of 80% unless you have mortgage insurance. This means your usable equity will usually be notably less than your total equity.

To make this a little clearer, let’s revisit our previous example. An 80% loan on a property valued at $650,000 would be $520,000. When you take away the existing mortgage of $400,000, this leaves $120,000 in usable equity.

You should also remember that borrowing against the equity in a property will increase the amount you owe on it. This means your regular repayments will increase, so you need to be sure you can afford the additional ongoing cost.

Tips on getting the most from your equity

There are a few simple things we recommend you do to maximise the returns you get from reinvesting your equity. This includes:

• Obeying the rule of four: When using equity to help buy another investment property, your budget should be four times your usable equity. For example, if you have $120,000 in usable equity, you should target properties worth up to $480,000. This will increase your chances of being able to secure finance and leave enough equity to cover your purchasing costs.
• Minimising your renovation budget: When using equity to help fund updates or upgrades to a property, make sure you manage your budget carefully. This means having a clear view of how much renovation works will cost and only releasing the equity actually required. It also means controlling your spending and avoiding any unnecessary costs.
• Being strategic about your renovation plans: Building on the previous point, updates and upgrades should be designed to add further value to the property. As such, you should focus on making changes that tenants and buyers in the area are looking for. You may also want to work with a local market specialist to identify which renovations will deliver the greatest returns.
• Working with an experienced mortgage broker: Each mortgage provider will have their own lending requirements and rules governing how equity can be used. It is important to work with a broker who understands this and can help you select a suitable lender.

Want to discuss this further?

If you would like more information on making the most of your equity, call Search Party Property. As property investment specialists, we understand the critical role equity plays and the many ways it can be used. We also offer complementary portfolio accelerator consultation sessions which are designed to help you grow your investments quickly.