Getting the wrong property investment advice unfortunately can result in the most costly mistake of your life, losing you thousands or hundreds of thousands of dollars. This is where the term “Property Sharks” stems from, i.e. advisors and / or companies selling overpriced properties and only lining their pockets.
“You can easily lose thousands of dollars in equity in your modest family home by using your equity to borrow and purchase an investment property if not done correctly,” explained Rick Collova of PEB Group.
“For example, let’s say you have a $500,000 family home with $300,000 of equity, i.e. a loan of $200,000.”
“And you want to buy an investment property for $500,000 using your equity to cover the deposit.”
“While this is a common enough scenario, there is a big trap for the unwary or first time property investor.”
“What can happen is that the investment property you want to purchase may be overpriced or it does not stack up when the banks do their valuation. For example, the banks may only value it at $400,000.”
“However, they may still lend you the $500,000 by making the difference out of the current equity in your family home. And if you have “property sharks” working for you, you may be none the wiser”.
How $100k of Your Equity Can Instantly Evaporate
“The problem is that the bank doesn’t have to tell you they have valued the second property at less than you paid for it. And worse still, usually they don’t. After all, you have enough equity in your family home to cover the deposit/loan ratio, you want the loan and the bank will make money on the loan, so they will give it to you.
‘You now have property assets worth only $900k, a mortgage of $700k and equity of $200k.”
“You’ve actually lost $100,000 of equity in the few weeks it takes to apply for and settle the new loan. That’s hardly the purpose of property investing.”
“To make this even clearer, suppose you were to sell the second property a few months down the track. You go to market and can only sell it for $400k, so you pay down your $700k mortgage to $300K.”
“You’re left with your family home still worth $500k and now a mortgage of $300k.”
“That extra $100k of equity you had originally, has just evaporated. Or more correctly it’s gone straight into the pocket of the person or property developer/shark who sold you the over priced investment property. This can happen when purchasing "off the plan" properties with little or no past sales history to research.”
Luckily there are processes that good property advisors use to stop this from happening, you just need to know what they are.
How to know you've got the Right Advice?
Mr Collova explains that while using equity in your existing home is the usual way most people start in property investing, it still had to be structured the right way to avoid nasty losses like the example above.
“A good advisor will get your broker to approach different lenders for the mortgage of the investment property than that of your family home."
The different lender will value the property and if the value is low, you will know because you will be short to purchase the property. You can then go back to the seller and negotiate the price down. Or simply not buy that property.
If you do not want to use a different lender, then your broker should make the bank's valuation of the investment property available to you, allowing you to ensure that the property you are purchasing has been priced appropriately”.
Either way will provide transparency and you will be better informed.
‘This is just one of the ways a professional property investor can help you and why we are always strongly recommending all property investors to get the best advice before investing,” Mr Collova said.
*This article is for general information purposes only. It is not intended as financial or investment advice and should not be construed or relied on as such. Before making any commitment of a financial nature you should seek advice from a qualified and registered financial or investment adviser.