Money and cash flow is the grease that will keep the cogs of your investment wheel turning. You need to look at property investment as a small business that you are trying to run, grow and protect. Just as with any business, cash is king.
Being asset rich and cash flow poor will eventually bring you unstuck.
Finance comes with a lot strings attached, conditions and costs. It’s critical that you don’t see the bank as your friend or ally. They are not, they are simply a tool for you to use to grow your property investment portfolio. Contrary to popular belief, or what the bank will tell you, it’s beneficial to spread your lending and bank accounts across a variety of financial institutions. This will limit their insight into your financial situation, and by protecting your financials, it may give you the breathing room you need when a tough financial situation comes along.
Banks have the ability to call in loans early or alter the loan to value ratios at short notice. If they can see your full financial picture because you have all your accounts with a single bank, they can see if you are becoming a risk to them. Don’t forget the banks are a business who’s aim it is make money. They will protect themselves from you if they perceive you are becoming over exposed or over committed.
So, all that being said, what’s the best way to set up your finance for property investment?
This is where you need to start building your team. Find a finance broker or use your accountant to understand the details and terms of your loans, have an understanding of what the triggers are for default, repayments and fixed terms if any. What are the penalties for early repayments, and what is the honeymoon period for the starting interest rate and what does it revert to. If you are armed with this knowledge, you can follow interest rate movements and have an understanding how that is going to impact on your individual financial position.
Your financial advisor really needs to be someone who is actively building their own portfolio, who has a personal and business understanding of how to obtain and structure the finances of a growing portfolio and can act as a mentor throughout the process.
An important part of the finance phase is to have a thorough and honest understanding of the yield that your investment is achieving. This means critical, honest and complete analysis of the full range of costs that are incurred through the acquisition and ownership of the property.
Account for the full range of costs – including stamp duty, building and pest reports, mortgage fees, creating the companies or investment structures, basically anything you spend buying the property that you would not have spent otherwise.
Each lender will have their own criteria to meet depending on your personal profile, your after-tax income, whether you are self employed, the kind of deposit you have. New APRA laws brought in late 2015 now require the banks to consider only 80% of the potential rental income when considering the loan application, hence finding fully positive geared properties will get harder in the eyes of the banks.
It is important to speak to mortgage brokers who have access to a range of banks and different lenders, particularly if you are sailing close to the wind. Small deposits, self employed all impact on borrowing capacity. Look at all options including leveraging the equity in your house as a way to overcome having to find the cash deposit, other options are to negotiate the price below the market value or purchase below market, then have it valued up to market release the equity in the property, renovation can also help create equity, for use in purchasing other properties.