More and more Australians are building wealth through the property market. According to the Australian Taxation Office, there are over 1.7 million landlords in Australia. Over a quarter of these own more than one investment property. The largest percentage of property investors are not high income earners with the majority falling into the $30,001 – $75,000 income bracket. So, what financial tips do you need to make smarter investment decisions?
Why do we invest in property?
- Wealth Creation
- Retirement Planning
- Capital growth
- Tax Benefits
Your goals might be long term, such as to fund an independent retirement, or short term, such as seeking capital growth during a housing boom. However investors should always look at their investments over the long term with a 7-10 year view if your strategy is to buy and hold.
Finance is equally as important as selecting the right property. In many cases it may even be more important. Why? The amount of property you can buy is determined by the amount of finance you can borrow. So if you don’t get your finance right then you may restrict your borrowing ability to create a large property portfolio. The rich get richer because they have better access to finance. Here are 10 finance tips for property investing.
1. Reduce your credit card limits and cancel any credits card you don’t use
Reducing your credit card limit can make a huge difference with how much you can borrow for your property. If you don’t use any credit cards you have you may like to consider cancelling them as lenders take credit cards into account when calculating how much you can borrow regardless of whether you use these or not.
2. Consolidate personal debt
Always look for the opportunity to consolidate any personal loans which have a higher rate of interest as these don’t only cost you more in interest but also impact on your borrowing capacity. This includes any interest on store cards from a department store.
3. Use different lenders
Loyalty and convenience is the main reason people continue to use the same lender to borrow money. Unfortunately this is reducing the amount that you are able to borrow and increasing your risk as one lender funding your whole portfolio results in them assessing all your properties as a whole rather than individually. By using different lenders you can always find the best deal, increase your borrowing ability and stay control of your assets.
4. Avoid Cross-Collateralising securities
This refers to providing a lender with security over more than one property. This can cause enormous problems when the properties increase in value and you want to release some of the newly created equity. The lender has your assets tied up so if you want to go to another lender that is offering a better deal, the current lender may not partially discharge their mortgage to allow you to refinance the property. Furthermore, if you are having financial problems and you wish to sell part of the portfolio to solve it, the lender may call in their loans which may mean selling all the properties in a manner which may be detrimental to you.
5. Have a plan or strategy
No one plans to fail… they just fail to plan!
We’ve all heard that saying before. Like any successful business, an investor should prepare a detailed business plan detailing the strategy to grow their property portfolio, the finance that is required to achieve this and a cash flow analysis of how the debt and other costs are to be serviced.
6. Regularly review your security
Giving too much security to lenders can greatly restrict your investment potential. As far as lenders are concerned there is never too much security. Review your property values annually and have them re-valued with the bank whenever there is a reasonable increase of around 7%. Over time you will be able to remove the security from your home or from one of the investment properties.
7. Have a Line of Credit or Redraw Facility
Focus on the positive but be prepared for the negatives! Unfortunately too few investors take this advice. They have done nothing to ensure that their cash flow is protected if times get tough. By having a cash reserve set up properly from the start through a line of credit or redraw facility you have this buffer in place to give yourself peace of mind.
8. Have the correct loan structures in place from the start
A poorly structured loan portfolio reduces your flexibility, increases your risk profile and can create reporting and tax nightmares. A poorly structured loan portfolio reduces flexibility through cross securitisation. Increases your risk if you have not separated your home and investment lending. And will not adequately separate tax deductible and non-deductible expenses which could mean losing out on deduction.
9. Interest only versus principle and interest
Structuring your investment loans with interest only increases your borrowing capacity and still allows you in most case to pay down the principle if you wish.
10. Use an experienced mortgage broker who specialises in investment home loans
The biggest finance tip is to have the right experienced and connected mortgage broker which specialises in investment property on your team. Contact a financial advisor to learn more about easier investing.
About David Chehade and Real Estate Investment Finance
David Chehade Founder and Managing Director of Real Estate Investment Finance is an active and passionate property investor who loves sharing his knowledge and helping others attain the dream of owning property and building wealth. Graduating in 2008 with a bachelor of commerce in Finance, Financial Planning and Accounting David continued his financial studies with a diploma in Financial Services specialising in Mortgage Broking. With an office in Brisbane and the Sunshine Coast he works with clients across South East Queensland and also work remotely with clients Australia wide. The benefits of working with a specialised property investment mortgage broker are endless as we pride ourselves on keeping up to date with the Australian property market and the wide range of suitable finance products available on the market.