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How To Use Your Home To Buy A Rental

Andrew Nicol, of Opes Partners, explains how to release the dead money locked inside your family home.

11 October 2021

Are you sitting on a goldmine?

Many Kiwis are sitting on a goldmine, and not digging. It’s sitting right there in plain sight. It’s our homes. According to the Real Estate Institute of New Zealand, the median house price in New Zealand increased by NZ$160,000 over the last five years. For many, this has created ‘equity’ in our homes. Equity is the difference between the market value of your property and what you owe on your home loan. Left untapped, this equity is dead money. It sits in your home getting zero per cent return. Here’s a way to unlock this dead money and put it to work, by investing in property. It’s called ‘leverage’.

Use the power of leverage

Leverage is where you use a little bit of your own wealth, a deposit, to secure a larger loan from a bank. As a homeowner, you may be able to unlock this dead money in your home to secure the deposit for an investment property. You then use that deposit to get a larger loan from another bank to buy an investment property. Because you own this new asset, you’ll get all of the extra equity that gets created as the property increases in value, even though you’ve bought this property with no cash and 100 per cent borrowed money.

Here's how it works

Let’s take the average NZ home, which five years ago was worth NZ$425,000. Let’s say when you bought it, you had a mortgage of NZ$340,000 (80 per cent). To keep it simple, let’s say you haven’t paid down any of that mortgage. Over those five years, the value of the average NZ property has gone up to NZ$585,000 (about 6.6 per cent a year on average). Now you have NZ$245,000 worth of equity in your home. NZ$160,000 of that is dead money. Unlock that equity by taking out a loan of NZ$160,000 against your house, and you may be able to get another loan of up to NZ$640,000 from a different bank. This gives you purchasing power of up NZ$800,000 to invest in property. In this way, you can invest in property without needing to save a deposit. And you can get a return on that dead money.

Buying a house worth $500,000

You might decide to buy a property for NZ$500,000. To be safe, let’s say the growth in property prices might slow to 5 per cent growth a year. With your new investment property of NZ$500,000 increasing at 5 per cent a year, in the first year you could make NZ$25,000 from dead money of NZ$100,000. That means instead of earning zero per cent return each year, you’re getting 25 per cent in the first year.

Leveraging your existing home can be an easy way to get into property. It can help you to start getting a return from the dead money within your home. But everyone’s different and buying a second property might not be the best idea for everyone. See a financial adviser and property expert to see if this works with your financial situation, level of risk, and goals. In New Zealand, different areas have property markets that work in different ways. Do your research. So, if you sit on a gold mine but don’t dig, what happens? You guessed it – nothing. Look what happens if you dig.

Published 28 November 2019

This article does not contain any financial advice and has not taken into account any particular person’s circumstances. Before relying on it, we recommend you speak with a financial adviser. This story reflects the views of the contributor only. Content comes from sources that we consider are accurate, but we do not guarantee that the content is accurate.

Informed Investor's content comes from sources that Informed Investor magazine considers accurate, but we do not guarantee its accuracy. Charts in Informed Investor are visually indicative, not exact. The content of Informed Investor is intended as general information only, and you use it at your own risk.

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