Let me preface this blog by saying that this strategy is NOT for everyone.
Using someone’s equity as a deposit or to securitise an investment property will incur risk from all parties if the investment turns sour. Always seek the advice of a qualified financial adviser/ mortgage broker.
But that said, I have worked with numerous clients who have adopted this strategy which has enabled them to leap into the investment market years before they could otherwise save the equivalent amount of money – in turn making them big money though property investment in today’s market.
A client had a $20,000 deposit in 2012 and wanted to buy their first investment property. Even though this was enough for a five per cent deposit at the time, the bank was not keen to lend to this person given they had no other assets and were on a graduate income.
So the strategy was to engage their parents to guarantee the new investment using their home a security. (Again there is a level of risk and each person’s circumstances need to be assessed individually).
So the parents of this client agreed to guarantee the investment using their family home and the client made their first investment in western Sydney for $193,000 (positively geared).
12 months later the same client wanted to invest again having saved another $20,000.
At this stage the first investment property had increased six per cent and the bank were willing to release the parents’ house as security and the first property was now held unencumbered by the client.
The client pursued the second investment property and has since purchases EIGHT MORE. Their total portfolio is now worth more than $3 million with a net equity of $1.2 million and is held neutrally geared, even though it started from just a $20,000 deposit four years ago.
The moral of the story is that without the initial ‘tapping of equity’ four years ago this client would still be working hard to save enough money to purchase their first home.
As the saying goes: “A ship in the harbour is safe, but that’s not what ships are made for”.