Hi All,
I am a property owner currently in preparation for my property investment portfolio. Just a little background:
(PPOR)Property price: 350, 000 AUD
Equity: 100,000 AUD
Debt: 250,000 AUD
Loan type: P&I
I am currently deciding on the type of strategy that I should go for. I have read quite a number of books and am aware of a number of strategies. I recently read one from Ed Chan and Tony Melvin which I am sure many of you are aware of. They advocate using equity to purchase, hold a property and live of. I understand this concept, but have several questions that I am hoping some of you may be able to help me with.
1) According to the book, since I have a 100,000 AUD in equity I can use that to borrow more money to purchase my IP. I understand that fully. Now here is the part that I don’t understand.
What happens to the equity in my PPOR? The way I understand it; it is merely used to be a guarantee for my IP. Therefore, say I purchase an IP for 250,000 AUD. My current equity in my PPOR will allow me to borrow up to that amount say, and therefore I do not need to fork out a cash deposit.
So my situation is now like this:
(PPOR)Property price: 350, 000 AUD
Equity: 100,000 AUD
Debt: 250,000 AUD
(IP)Property value: 250,000 AUD
Equity: 0
Debt: 250,000 AUD
In summary: I am using 100,000 AUD equity in my PPOR to borrow more. There is no charge for using the equity in my PPOR as it merely acts as a guarantee. Is this correct?
2) The book mentions paying for the holding cost of the IP with equity. Holding cost takes into account rents, maintenance, tax etc.
So for example
IP Year 1 Year 2 Year 3
Value 250,000 267,500 286,225
Debt -250,000 -255,000 - 260,350
Holding cost -5000 -5000 -5000
Cost of equity 0 -350 -350
(@7%)
Equity 0 11,650 25,025
(1.Assuming 7% growth. I am not focussing on the growth rate. This may be optimistic. I am more interested in the concept
2. Holding cost is 2% as a rule of thumb from the book. Again more interested in the concept.
3. Interest only loan)
I understand the concept and the table above quite readily. But here is what I don’t get. Equity is the perception of value. What I mean is in year 2 I have 11,650 AUD of value, bit it is not cash. At the end of the day, I still have to fork out 5,000 AUD to pay for the holding costs for each year. The main question is how do I convert my equity to a form equivalent to cash? This is what I really don’t understand.
My understanding is to do a revaluation of the IP annually. Any gain in equity can then be used to take out a line of credit (LOC) where it is then used to pay for holding costs. But doing this would mean consistently taking out debt to pay for debt.
Say after 20 years, My equity is twice my debt and I would like to be debt free on that IP. Can I use the equity to cover the debt? And if so, how do I do that because the only way I know how to access equity is though a LOC which is another form of debt.
Very confused…..Please help!
I am a property owner currently in preparation for my property investment portfolio. Just a little background:
(PPOR)Property price: 350, 000 AUD
Equity: 100,000 AUD
Debt: 250,000 AUD
Loan type: P&I
I am currently deciding on the type of strategy that I should go for. I have read quite a number of books and am aware of a number of strategies. I recently read one from Ed Chan and Tony Melvin which I am sure many of you are aware of. They advocate using equity to purchase, hold a property and live of. I understand this concept, but have several questions that I am hoping some of you may be able to help me with.
1) According to the book, since I have a 100,000 AUD in equity I can use that to borrow more money to purchase my IP. I understand that fully. Now here is the part that I don’t understand.
What happens to the equity in my PPOR? The way I understand it; it is merely used to be a guarantee for my IP. Therefore, say I purchase an IP for 250,000 AUD. My current equity in my PPOR will allow me to borrow up to that amount say, and therefore I do not need to fork out a cash deposit.
So my situation is now like this:
(PPOR)Property price: 350, 000 AUD
Equity: 100,000 AUD
Debt: 250,000 AUD
(IP)Property value: 250,000 AUD
Equity: 0
Debt: 250,000 AUD
In summary: I am using 100,000 AUD equity in my PPOR to borrow more. There is no charge for using the equity in my PPOR as it merely acts as a guarantee. Is this correct?
2) The book mentions paying for the holding cost of the IP with equity. Holding cost takes into account rents, maintenance, tax etc.
So for example
IP Year 1 Year 2 Year 3
Value 250,000 267,500 286,225
Debt -250,000 -255,000 - 260,350
Holding cost -5000 -5000 -5000
Cost of equity 0 -350 -350
(@7%)
Equity 0 11,650 25,025
(1.Assuming 7% growth. I am not focussing on the growth rate. This may be optimistic. I am more interested in the concept
2. Holding cost is 2% as a rule of thumb from the book. Again more interested in the concept.
3. Interest only loan)
I understand the concept and the table above quite readily. But here is what I don’t get. Equity is the perception of value. What I mean is in year 2 I have 11,650 AUD of value, bit it is not cash. At the end of the day, I still have to fork out 5,000 AUD to pay for the holding costs for each year. The main question is how do I convert my equity to a form equivalent to cash? This is what I really don’t understand.
My understanding is to do a revaluation of the IP annually. Any gain in equity can then be used to take out a line of credit (LOC) where it is then used to pay for holding costs. But doing this would mean consistently taking out debt to pay for debt.
Say after 20 years, My equity is twice my debt and I would like to be debt free on that IP. Can I use the equity to cover the debt? And if so, how do I do that because the only way I know how to access equity is though a LOC which is another form of debt.
Very confused…..Please help!