$130K in equity - what would you do?

Hi Everyone

We bought our first investment property last year in West Footscray for $690k, did a cheap renovation and it has been revalued at $800k. It gets us about $1850 rent per month and our interest repayments are about $1660.

The bank has said we now have $130k in equity so we've been looking at Brisbane and Hobart for stand alone houses.

I'm curious what others on here would do or have done with around $130k equity?

Would you spread it to some cheaper houses in different states?

Is there a rule you follow about keeping a set percentage of your equity freed up or would you use the majority of it?

Or would you do what we've been looking at doing which is pretty much looking for a $500-700k house, 10% deposit that would have a 3.5% to 4% yield and an interest only loan?

Let me know what some of you guys have done!

 

I'd probably do nothing but pay a little bit more to bring down the debt...

 

I would put aside some funds as a buffer. If you already have buffers available, then you could look at:

• Buying two properties - neutral cash flow
• Buy one expensive property in a blue chip area

Personally, we prefer buying two properties over one. It goes back to how much negative cash flow you are able to sustain or are comfortable with, and what your strategy is.

 

Draw out the 130K so its available to use. Leave 60K untouched, and purchase a cash cow using @ 70K of the equity, and with the surpluse 8 -10K from the cash cow, pay down debt. You didnt say whether you have a PPOR debt or not? If so, attack that. If not, attack West Footscray. Remember, when your West Footscray loan eventually becomes P&I (and it will) the repayments will increase by @ 40-45% . For the time being, the repayments are slightly less than the rent , but that wont stay the case... Get rid of either PPOR debt or West Footscray debt so that you are able to deal with the P&I repayments when they eventually arrive. You can accumulate while deleveraging. Its just sensible, prudent planning for a sustainable, profitable investment portfolio.

 

Thanks for the replies everyone.

West Footscray is the only house we own. We're living rent free at a family property and probably will be for the next 2 years. We won't be moving to West Footscray either so it'll continue being a rental.

We've got a good interest only rate that i get through work that i can continue rolling over if need be.

Between both our incomes and savings we're in a pretty good position to take on more debt if need be.

Is there a percentage of debt that people generally achieve before purchasing another?

 

I'm curious to know that too.
Personally I have found that it's not mathematical. And each purchase changes the strategy. My personal situation allows for some family help if need be, but I'm not comfortable with interest only so I have opted for P&I. I wanted to bring the debt down to a point where no more than xx a month goes out of my pocket for the IP and I keep a buffer of all expenses for 6 months minimum. Working on both but finding that delaying another purchase means I'm likely to get priced out, so now actively looking to buy again. So doesn't look like there is any formula to it (atleast for me) and that a lot depends on my circumstances and risk appetite.

 

Good job on the first IP!

I think the most important thing to consider is your 'sleep test'. Can you sleep at night with 95% LVR if the interest rates are go up? Perhaps 80% is your cap?

I would say if you have had success like that initially, I would say you're onto a good thing and be looking to repeat it over and over. My wife and I have been tempted to go interstate, but have had success sticking to an area we knew well where we lived close by, could add value ourselves (sweat equity) and could identify great opportunities due to our knowledge of the streets / councils etc.

 

I would buy two cheap properties for cash, renovate and rent out, life time income with no mortgage and then use the cash flow for your next project..

 

Pay off a little more, remember this is not bird in hand, just valuation and paper profit, a downturn can easily take that 130K away just as fast as it going up.

sometimes taking out HEL (Home Equity Loan) can turn into a HELL Loan
it happened before not long ago in a great country called the USA - no one talks about HEL loan over there anymore but before 2007 it was all the rage.

Record numbers under mortgage stress

I would build up lot of cash and buffer a downturn will come it not if it just a matter of when, when all hope is lost that when you strike