Gold Coast Property Finance Blog

There's a couple of things that I'd like to share with you today that all property investors should keep in mind. And it all centers around what I call the financial brick wall. What that is is, when people grow their portfolios to a certain size, they tend to come up to a stage where the bank won't lend them any more money due to the income servicing requirements of the bank. What we like to do is help to structure our clients to get around that financial brick wall. So, there's a couple of points that we always look at and think are very important for property investors when they're getting loans.

The first one is not to have all your eggs in one basket. Having all your eggs in one basket means that the bank that's lending you the money also has access to your transaction or savings account so they can see how much income you're earning every week. They also have access to your credit cards, so they know your spending habits. They also have security over all your properties with the one lender. That puts the bank in a very strong position and puts you in a much weaker position.

Particularly when we look at what a lot of banks use is an all monies clause. What that means is, if for one reason or another, a lender wanted to call in a loan on one property, if they had the lending of all your properties they could actually call in all of the loans at once. This can be financially devastating. Although rare, it is something that needs to be planned for.

My next point on avoiding the financial brick wall is to understand mortgage insurance and how that works. Mortgage insurance is often charged when people either use a low document loan or borrow over 80% of the value of the property. There are two main mortgage insurers in the market PMI and Jenworth. They both have a maximum exposure of two and a half million dollars.

Then, there are some other lenders that we need to be aware of that have their own mortgage insurance products, which then allows us to borrow more. Again, using lenders that don't use the term mortgage insurers. The rules of mortgage insurers can be quite demanding when getting approved, and often very separate to what their actual lender's policies are. It is important when you're structuring a finance application to know the mortgage insurer's requirements, and structure the application appropriately.

Point three in avoiding the financial brick wall is being able to access your equity regularly. As property investors, we create equity by capital growth, but also by purchasing our properties really well. Or, by doing minor renovations and improvements to the property, that then create equity. This equity is no good to us if we can't access it. And that's why it's important to know the particular policies of different lenders when it comes to regularly increasing your loans, to then access that equity, which you'll then want to use again on another investment.

So, as an example, I have particular lenders that will allow you to access your equity or increase your loan as often as you feel that the property has increased in value. There are also other lenders out there in the market that have a six month, or a 12 month requirement. Or a waiting period. A 6 month or a 12 month waiting period until they will allow you to upstamp, or increase, the loan.

Where this comes important, is often when you purchase a property, if you bought it well, the actual valuation is probably more than the purchase price. Lenders will only lend on the purchase price. So, to have a lender that after the property has settled, go back and advance money on the actual valuation, is a really powerful tool.

Other things, such as doing minor renovations, might not cost you a lot of money, and it might be something that you do as soon as you buy the property, such as paint the walls and change the carpet and just do a bit of gardening. This can make quite an impact on the valuation of the property. Because, remember, the valuations are subjective. So, being able to access equity on the minor improvements that you've made, as soon as you've bought the property, again, is a really powerful tool, rather than having to wait twelve months down the track.

Point four in avoiding the financial brick wall. It is important to understand property valuers and how they work, and how they're working with lenders. What I'm talking about is the policies of lenders. Some lenders allow us, the finance broker, to order the valuation on your behalf, while other lenders choose the valuer in a completely random manner, which then waxes more independent for the lender, gives a lot less control to you as the borrower.

Because valuers are subjective, and the valuations can vary greatly in some instances compared to one of their peers, it is a really powerful tool to be able to choose the valuer that you're comfortable with that is an expert in the area that you're gaining value, that you know that they know all the comparable sales, that you know that they're familiar with the area, so that they can give you a fair, and also a positive valuation.

Point five in avoiding the financial brick wall is that cash flow is king. Structuring your finances so that you have as much cash available, is really important. And that's what we were talking about in point one, two, three, and four they all lead into point five, that cash flow is king. Having available cash is really important. For instance, if a tenant decides to move out, or they don't pay for a period of time, it's important to have that buffer there so that it doesn't cause you stress.

We structure finance so that we often give investors what we call 100% offset account, which means that they often borrow a little bit more money than what they need to settle the property, and they leave that in the 100% offset account. When they're not using this money, they don't pay interest on it, but it's there for their peace of mind, so they know full well, if something happens or they need access to cash, they have it. They have it at very cheap rates, and they have quick access to it. This insulates borrowers from the financial brick wall.

At Drexel, I help property investors compare loans, and I advise them on which one is going to best suit their unique circumstances. I then structure the loan so that it's going to take into account point one, two, three, four, and five, that we spoke about earlier. And then, I present the information to the lender in the most favorable light, in a way that I know they'll be able to understand.

I'm here to work with property investors over the long term, so if there's any more information that you would like, or you've got any questions about what we spoke about earlier, please give me a call.