Financing your investment property

2. Using your equity in another property

Using your equity in another property, for example, your residential home, is another way to finance the purchase of an investment property. Your equity is how much you own of a current property. It’s the difference between what the property is worth and any outstanding loan balance on it.

For example:

• If you have a property with a current market value of $800,000 and the loan balance on it is $300,000, then you have $500,000 in equity ($800,000 less $300,000). You can use some or all of this equity as a deposit for an investment property loan.
•  If you have a property worth $900,000 and you own it outright, then you have $900,000 in equity.

If you have owned (or been paying off) property in Australia since before the boom in prices over the past few years, then your equity is likely to have increased significantly. Many property investors build large property portfolios by progressively using their equity in one or more properties as deposits for future property purchases.

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3. Getting a guarantor

Getting a guarantor for your investment property loan is another way to get your finance approved. This may be necessary if you can’t satisfy the lender’s deposit requirements.

A guarantor is a person, usually a family member, who agrees to become legally liable for your loan repayments if you are unable to make them. The guarantor arrangement should only need to be in place until you have built up sufficient equity in the investment property, for example, 20%.

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4. Using your SMSF to buy an investment property

If you have a self-managed super fund, with sufficient available funds, you can use it to buy an investment property, provided you comply with Australia’s superannuation legislation. To ensure your compliance, you need to ensure all of the following:

• Create a separate trust within your SMSF to hold the investment property asset, as it cannot be owned by an SMSF member (or any relatives).
• Takeout a loan under a limited recourse borrowing arrangement (LRBA) to protect your other SMSF assets from lender claims if you default on your repayments.
• You can’t rent out your investment property to a friend or family member.
• All property income (tenant rent) and expenses must be recorded in the SMSF trust.

It’s important to note, many people may apply for a SMSF loan to fund the purchase as their super balance may be not enough to cover the entire purchase. In addition, the loan application will be dependent on the individuals within the SMSF being approved for finance, as they are ultimately responsible for servicing of the loan.

Typically, a deposit for a SMSF loan is higher at 30% or 40% of purchase price, hence it's recommended to have a super balance of at least $200,000 to consider this strategy.