Owning property is an excellent way to build wealth. Historically, property has been a less volatile investment with real estate values invariably tracking upwards over time. What’s more, you have the added benefit of being able to “leverage” your existing real estate investment to buy an investment property using borrowed money and grow your property portfolio even further.

Using equity to grow your investment portfolio

How much equity do you have in your home or investment property? Enough to fund your next property purchase and grow your investment portfolio?

If you’ve owned your property for some time and provided you have the means to service a mortgage, you may be able to access the equity in your property to fund the purchase of your next property. Equity is the difference between your property’s value and the amount you still owe on your mortgage. It’s essentially the bit you “own” of the property and it can be used as a deposit to buy another property.

If you’re buying a residential investment property or you’re using a residential investment property you already own as security for a new loan, you’ll generally need at least a 30 per cent deposit. Instead of having to save up the cash for the deposit though, you could use the equity in your existing property to purchase another property.

Calculating the equity in your property

To calculate how much equity you have, you’ll need to know the market value of your property. You can use the valuation on QV or get a registered valuation of the property to determine its market value. You’ll also need to know how much you still owe on any lending secured by the property, which you can obtain from your lender.

Lenders will determine how much you are able to borrow by looking at a combination of your equity and income. Different lenders will have different lending policies and the combination of equity and income may vary from lender to lender.

Your potential rental income from the investment property you’re planning to buy will be included in the lender’s servicing calculations when determining your borrowing capacity. Contact a Harcourts’ Property Manager to arrange a rental appraisal to help you determine the likely rental income from the property.

You’re required to have at least 20 per cent of equity in your existing property after new lending is taken out if you’re using the equity in your family home, or 30 per cent equity if using your existing investment property. That means you could borrow up to 80 per cent of the value of your family home and 70 per cent on any investment properties you own, based on current loan to value restrictions.

So, how is the market?
We are seeing an increase in market energy with strong activity from determined buyers. In short, the market is humming. It’s all over the media, and it’s certainly ringing true in the statistics as well. If you are thinking of selling, it’s the best it's been in years.

What is contributing to the increase in sales volume? The high sales volumes have reduced available listings and with multiple active buying segments, this is resulting in a strong demand for quality properties. Also, an increase in confidence in the housing market which has been underpinned by a relatively strong economy, good employment rates and the low interest rate environment.

Manukau’s statistics
In Manukau, volume is up, stock remained tight, prices up and days to sell stable.
The median sale price for Manukau increased by 4.3% over a one year period and if we look at this data over a five year period, this has increased by 6.8%.

Market highlights
Across NZ, Listing supply has increased to 3.2% compared to the same time last year making it the busiest Jnaury in 4 years. In Auckland, this number increased by 9.7% making it the highest number of residential properties sold in the month of January since January 2016.

In Auckland, median house prices increased by 8.7% to $875,000 – up from $805,000 at the same time last year.

In summary
An extremely positive start to 2020 with all factors pointing towards a busy year ahead.

Greg Dickason from Corelogic, says that besides checking your credit history, and your capacity to pay, lenders check your actual loan collateral (the property you are buying), to make sure if they need to repossess and sell, they will recoup their money.

So how do lenders value your home?

In the normal process they will order an ‘Automated Valuation Model (AVM) Report, from a provider (like Corelogic). This machine-generated report will contain an estimated value calculated by looking at recent comparable sales in the surrounding area (so sales that are within a close proximity to your home with a similar land and floor size).

Interestingly, modern AVM models even self-learn by using AI techniques to weight the different factors and become more accurate through ‘machine learning’. An AVM also estimates its own accuracy. In what is known as a ‘Forecast Standard Deviation’, it can tell the lender how much to trust the figure returned.

Lenders can then choose to use an accurate AVM and lend to you, (which they will often do if you are providing a deposit of over 20% of the homes value). If the AVM is inaccurate, or the home is very unique or if your deposit is small, they may ‘cascade’ the valuation to a registered valuer working in your area.

Registered valuers are degree-qualified professionals who spend a considerable amount of time researching the area and walking through sold properties. They will undertake a physical inspection of the property and provide a comprehensive report that meets Bank and Valuation Industry standards.

On occasion, other forms of valuation may be carried out including a Desktop valuation.

So in conclusion, valuing a property ends up being a combination of machine learning models applied to property data, working in tandem with professional property valuers.

Source

A version of this article first appeared in the Australian Financial Times.