Investors Ask: Debt/equity balance
Q. I bought my first investment property three years ago and it has gone up in value nicely. I’m confident I can release enough equity by refinancing at the existing 80 per cent to buy another property, but I’ll have to take out a 90 per cent loan on the second property. I’m keen to build my portfolio but am worried about being too deeply in the red. Is there a magic balance of debt versus equity?
First and foremost, everybody’s circumstances are different. You must be comfortable with the amount of debt you have, and your investment strategy must fit in with your current and future financial commitments.
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You should begin by running some cost scenarios for accessing the equity in your current property and the loan to purchase your new investment. If you are concerned about getting in over your head, choose a more modest price bracket for your new property in an area slated for future growth with good rental demand.
Ensure you include all set up, legal and lender’s mortgage insurance costs so you understand the true cost of the initiative. You should also seek advice from your accountant or financial planner regarding structure and tax.
You must be comfortable with the amount you need to contribute monthly to service the loan? Will you be able to make payments when the property is untenanted, bearing in mind costs such as strata fees if you are purchasing a unit? Good quality landlord’s insurance is also a must for peace of mind.
Lisa Montgomery, CEO, Resi Mortgage Corporation
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