Investors looking to purchase their next property often face a critical question: how should they fund their next investment? Some have built up equity in their existing properties, while others have cash savings sitting in the bank. The right strategy depends on their financial situation, investment goals, and tax considerations.
In this article, we explore key investment strategies that can help you leverage your current assets effectively and take the next step in growing your property portfolio.
Unlocking Equity in Your Existing Property
For many investors, the best way to finance their next property is by leveraging the equity in their current home or investment properties. Equity is the difference between the market value of a property and the remaining loan balance.
For example, if you own a property worth $1,000,000 and have a remaining loan of $500,000, you have $500,000 in equity. However, banks typically allow investors to borrow up to 80% of the property's value, meaning in this case, an additional $300,000 could be accessed to fund an investment.
How to Access Your Equity:
- Loan Revaluation – Get your property revalued to determine the current market worth and available equity.
Equity Release Loan – Increase your loan to access the available funds, either as a lump sum or a line of credit.
- Loan-to-Value Ratio (LVR) Considerations – Borrowing beyond 80% LVR incurs Lenders Mortgage Insurance (LMI), but some professionals in eligible fields can secure LMI waivers.
By using equity, investors can fund a deposit or even cover 100% of the purchase price plus costs, helping them build wealth without using personal savings.
Using Cash Savings Wisely: Debt Recycling Strategy
Some investors assume that using their savings for a deposit is the best option. While this can be a straightforward approach, it may not always be the most tax-efficient. Instead, a debt recycling strategy can optimise both tax benefits and financial structure.
How Debt Recycling Works:
- Pay Down Your Owner-Occupied Mortgage – Instead of using cash for a deposit, apply it towards reducing your non-tax-deductible home loan.
- Take Out an Investment Loan – Re-borrow the amount using an equity loan, ensuring the new loan is separate from the owner-occupied mortgage.
- Maintain Clear Loan Purpose – By structuring the new loan correctly, the interest becomes tax-deductible, improving cash flow.
- Repeat the Process – Over time, as your equity grows, you can continue this strategy to fund further investments.
This approach allows investors to convert non-deductible debt into deductible debt, potentially leading to significant tax savings while still expanding their property portfolio.
Buying Under Market Value and Fast-Tracking Growth
For some investors, especially those with strong income but limited equity, purchasing a high-growth property below market value can be a smart move. This strategy works well when:
- The property has strong capital growth potential due to location, infrastructure projects, or market demand.
- The investor can renovate or add value, improving the property's valuation within 12 months.
- A strategic revaluation can unlock new equity, enabling further investments.
For example, if an investor secures a property for $450,000, but it is valued at $500,000 within a year, they can potentially release equity sooner and reinvest into another property.
This approach works best for investors comfortable with short-term capital appreciation strategies and who have a strong understanding of market fundamentals.
Structuring Your Loans for Long-Term Growth
Once an investor has decided on their funding strategy, structuring their loans correctly is essential. Some key considerations include:
- Separating Investment and Owner-Occupied Loans – To ensure tax-deductibility and easier accounting.
- Interest-Only vs. Principal & Interest – Interest-only loans can improve cash flow, while principal & interest repayments help reduce debt over time.
- Fixed vs. Variable Interest Rates – Fixed rates offer stability, while variable rates provide flexibility for future equity releases.
- Offset Accounts – Can be used to reduce interest on non-deductible debt while keeping funds accessible for future investments.
A well-structured loan portfolio will help investors manage risk, improve cash flow, and keep their investment strategy scalable.
Planning Your Next Steps with a Whiteboard Strategy Session
Every investor's financial situation is unique, and choosing the right strategy requires a clear, well-planned approach. A whiteboard strategy session can be an excellent way to visualise different financing options, understand loan structures, and determine the best path forward.
By reviewing equity positions, cash flow, tax benefits, and market opportunities, investors can confidently make their next move.
Final Thoughts: Choosing the Best Investment Strategy for You
Whether you're leveraging equity, using a debt recycling strategy, or purchasing properties under market value, the key to successful investing is planning and structuring your finances strategically. By working with experts who understand the intricacies of property finance, investors can unlock the potential of their portfolios and take their wealth-building journey to the next level.
Unlock Your Property's Potential!
If you're seeking expert property management in Newcastle and Lake Macquarie, our dedicated team at Century 21 Newcastle is here to help you maximise your rental returns. For personalised, tailored advice from our investor consultants, click here to book an investment consultation via Calendly.
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