But what if I don't have $100,000 to invest in property?
The above example might sound compelling, but what if you don't have $100,000 to invest.
Many Kiwis don't, so how do so many people still get started with investment property?
This is where the second type of leverage comes in – using the equity in your own home to fund the deposit for your investment property.
Over the last 5 years, the median house price in New Zealand increased from $454,000 to $629,000 (Dec 2014 - Dec 2019). That's $175,000!
That means that the median homeowner now has an additional $175,000 worth of equity within their home.
You can use some, but not all of this equity, to help fund the deposit for your investment property.
Let's say that you bought the median house in December 2014, and used a 20% deposit. That means you started out with a mortgage of $363,200.
Under the Reserve Bank's lending restrictions you can borrow up to 80% of the value of your home. Because your property is now worth $629,000, that means you can increase your borrowing up to a maximum of $503,200.
But, remember you've still got that mortgage, of $363.2K.
So once you take that away from the maximum amount you can borrow, there is still borrow $140,000 against your own property.
That might sound scary taking out another mortgage, but the repayments on this mortgage will be covered by the tenant of your rental property (more about that in the third type of leverage), and your total 'net worth' will be exactly the same in the end.
Now that you can take an extra $140,000 out against your own home, you can use that money as your deposit to invest.
If you were to buy a brand new property, you only need a 20% deposit for your investment. This means that you can now buy a $700,000 investment property.
That's why you don't need to have a lot of cash to get started in investment property – you can use the second type of leverage to fund your deposit.