17 August

Using equity to buy a second property

Capital Claims Tax Depreciation are not financial, accounting or real estate advisers. This information is general and should not be relied upon for personal decision-making. We always recommend you speak with a financial advisor and/or your accountant if you are considering purchasing an investment property.

If you are a homeowner and are wanting to buy an investment property, you may be able to access the equity in your home to help you with the deposit for the investment property.

By accessing the equity in your home, you can use this towards the deposit without having to dip into your own cash or save money for the deposit. It’s a no cash deposit!

What exactly is equity

Equity in a property is effectively the value of your property that you “actually” own. So comparing the amount of money your property is worth today as to what it was worth when you purchased your property can give you a good idea of the equity you have as over time, your property will usually increase in value. And the longer you have owned your property usually the more equity you will have!

To work out your equity in the most simple terms, you need to subtract your current debt on your mortgage from the current value of your property.

For example, if your property is currently valued at $600,000 and you owe $400,000 on your mortgage, you will have $200,000 in equity.

How much equity do I need to buy an investment property?

Financial institutions will allow you to typically borrow up to 80% LVR (Loan-to-Value Ratio) of your available equity.

If we apply the above example of having $200,000 in equity x 80% LVR = $160,000 to put towards purchasing an investment property. However other financial institutions may have different allowances so check with your institution.

How much deposit do I need for an investment property?

The usual deposit is 20%. However, some financial institutions may offer a 10% deposit or even a 5% deposit (you will usually need to factor in paying LMI – Lenders Mortgage Insurance for any deposit less than 20%). Other fees to take into consideration when purchasing an investment property are:

  • Real Estate Fees
  • Solicitor/Conveyancer
  • Stamp Duty
  • Tax Depreciation Schedule
  • Insurances
  • Building and Pest Inspection Reports

Who values my property for equity purposes?

Your financial institution will usually engage an independent valuer to complete a bank valuation.  

The bank valuation is assessed by a qualified valuer and is used for bank purposes only. A bank valuation will take into consideration risks for example environmental factors ie. flood or bushfire areas. The bank valuation is usually lower than a market valuation.

A market valuation is provided by a real estate agent. It is based on the sales in the current market and comparing to similar properties in that location. Also taking into consideration what the sellers would like for their property plus what the buyers in the current market will pay for the property.

How to increase your equity

Here are some ways you can increase your equity:

  • You can pay more than just your minimum mortgage repayments;
  • Complete a renovations, do improvements, landscaping and maintenance that will increase the value of your home;
  • You can decrease your loan term from the typical 30-year term. Your repayments will be higher however it will increase your equity quicker.

When considering the affordability of owning and investment property, it is important to consider the deductions claimable for tax depreciation

Once you own an investment property, an important document that will help you on your investment property journey is your Tax Depreciation Schedule. By organising this important document from a qualified quantity surveyor like us here at Capital Claims Tax Depreciation, it will reduce your tax payable income and help with your cash flow.

What are Depreciation Schedules?

Depreciation schedules allow savvy property investors to claim a deduction for the wear-and-tear on their investment property known as the tax depreciation claim.

Depreciation Claim

Depreciation claims are made each financial year and can total thousands of dollars for residential investment properties, they can be hundreds of thousands for commercial investment properties!

Is it worth buying a second property with equity?

As with all major financial decisions, it is best to do your research and seek appropriate and professional advice. What can you afford to purchase and maintain moving forward? What type of investment property is best for your strategy, residential or commercial? What location will you purchase in?

It’s best to crunch your numbers, speak to your financial advisers, look at ongoing fees of owning your investment property whilst also taking into consideration the tax deduction benefits available to you for owning an investment property.

Download our FREE Rental Property Tax Deductions Checklist to see what other tax deductions you are entitled to claim from owning an investment property.

We are always happy to have chat to you about tax depreciation and what approximate depreciation claims are available to you from your investment property. We can also give you a free quote for your depreciation schedule.

Please call one of our friendly tax depreciation experts on 1300 922 220. Or you can visit our website and have a chat online. We also have a simple online estimate form that you can complete.

click to estimate tax depreciation deductions for rental property

About Mark Wilkins

Mark is an expert quantity surveyor, business owner, public speaker and property developer. With 20+ years experience in the construction and quantity surveying industry Mark’s specialist expertise have been sought in consultant capacity by professional bodies such as the National Institute of Accountants and the National Tax and Accountants Association, and he has presented at various property and tax seminars and expos nationwide. Mark holds a Bachelor of Construction Management from the University of Newcastle, is an affiliate member of the Australian Institute of Quantity Surveyors and a Registered Tax Agent.

View all posts by Mark Wilkins

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