Q. How much equity do I need to buy an investment property?
A. You need to have at least 33% equity in your own home. Why 33%? Because 20% must stay untouched. Then you can use anything over that threshold as a deposit on investment property.
For example, your own home is worth $800,000 and the mortgage is $500,000. 800,000 x 0.8 less mortgage $500,000 = Investable equity $140,000. So $140,000 can be used as a 20% deposit on a brand new rental property. This means the maximum purchase price you can go up to is $700,000. If you use $140,000 as a 30% deposit towards an older property, then your maximum purchase price is only $466,000. Huge difference!
Example No.2: Value of your home is $750,000, mortgage is $450,000.
750,000 x 0.8 – $450,000 = $150,000 Investable Equity $150,000/20×100=$750,000 Max Purchase Price for a Brand New IP. Congratulations, Give us a call!
Example No.3: Value of your Home is $750,000, mortgage $580,000. $750,000×0.8-$580,000=20,000 Investable Equity – This will not be enough for you to buy a brand-new property in Hamilton or Auckland. Keep reducing your mortgage balance, add value to your property or simply wait for the market to make your property appreciate. Do this exercise again in 6-12 months.