<img class="alignright wp-image-28655 " src="http://www.realwealthaustralia.com/wp-content/uploads/2016/05/coins-increasing-300×200.jpg" alt="Positively Geared Property with No Deposit" width="417" height="278" srcset="https://www.realwealthaustralia.com/wp-content/uploads/2016/05/coins-increasing-300×200.jpg 300w, https://www.realwealthaustralia.com/wp-content/uploads/2016/05/coins-increasing-768×512.jpg 768w, https://www.realwealthaustralia.com/wp-content/uploads/2016/05/coins-increasing-500×334.jpg 500w, https://www.realwealthaustralia go to website.com/wp-content/uploads/2016/05/coins-increasing.jpg 1000w” sizes=”(max-width: 417px) 100vw, 417px” />
Surely it’s a win-win for you and the bank: you buy a positive cashflow property with guaranteed mortgage repayments, and the bank earns a ton of interest from the loan. But would a bank ever really let you buy a property with no cash down?
Mark posed this query to me this week, and the first thing I want to say is this: it isn’t a completely crazy question! With property prices costing pretty much the earth, moon and stars right now, plenty of people are wondering how they can possibly start investing, or reach their next property goal, when they don’t have enough money to put down a deposit and secure a loan.
For the record, Mark isn’t the only one to ask me this question. I’ve had a ton of clients tell me they can source a property with positive cashflow to the tune of $100 a week, but they don’t have a deposit saved.
They wonder if, under these circumstances, the bank will lend the whole lot.
In a nutshell – no.
Banks don’t really like giving out 100% loans with no deposit. In fact, they might even decide you’re high risk and ask you to throw in an even bigger deposit instead!
You can get loans with 80% loan-to-value-ratio (LVR), or even 90% LVR and some borrowers can even get 95% LVR. But that’s still assuming you’ve got some cash to lay down as a deposit to bridge the gap. If you go with a high LVR loan like that, you’re also going to pay a hefty mortgage insurance premium on top.
But I do have a solution, and it’s a solution that can leapfrog you from one property to several, with no cash down.
Equity is an amazing tool for purchasing without a single dollar coming out of your account. If you own your own home and you’ve paid down some of your mortgage, or it’s increased in value since you bought it, you can leverage that equity as the deposit on your next investment property.
Using equity in this way as a deposit means you’re actually borrowing 100% of the property’s value from the bank. If that’s not a cash-free deposit, I don’t know what is!
For example, let’s say you have $100,000 equity in your home. If you buy a positively-geared property, you’ve then got enough cashflow to cover the mortgage on the investment, and also the additional repayments you’ll need to make on your own home loan.
Ta-da! You just bought a property with no money out of your back pocket.
The beauty of equity is that when your investment property accumulates some equity of its own, you can use that to buy another property. It’s beautiful!
I should mention that you still have to factor in your borrowing power, so if your equity plus your income doesn’t give you enough wiggle room to secure a loan, you’ll need cash in your pocket to convince banks that you’re not high risk.
Then of course you need to make sure you’ve got a buffer to protect yourself from unexpected expenses and interest rate rises. You always have to future-proof your situation in case interest rates rise..
But here’s what I love most about questions like Mark’s that pop up in our Burning Questions podcast: it shows how property as a wealth-creation tool allows you to be creative and find solutions to problems that are holding you hostage.
Using equity to replace a cash deposit is just one way to move forward when you feel like you’re stuck.
It’s genuinely exciting to see how many ways there are to get started and reach your goals, if you’re willing to ask some crazy questions, like Mark.
If you need a hand getting your own investment property ball rolling, we’re always here to give you a hand. You can contact our team here.
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