Five essential ingredients to investment success that the banks won’t tell you!
When it comes to financing your investment properties, choosing the wrong loan structure, lender or product can have a serious impact on your investment journey.
It’s important to consider that banks are more focused on their profits & products, than providing a personalized investment lending options tailored to your investment property goals.
Here are the top five ingredients for structuring a successful portfolio – which you won’t hear from the banks.
#1 Understand what impacts your borrowing capacity: Most lenders have specific policies that restrict or limit lending to those with lower incomes or those seeking to invest in properties in certain postcodes. Conditions will differ between lenders.
CBA, for example, announced this week that it will now cap rental yields at 8% for mining towns when assessing loan applications. The property might yield much more in reality, but the bank plans to only use 8% in its calculations as part of its risk mitigation.
In addition to rental income, existing debt, LVR, whether you are buying alone or with someone else, your age (and how this affects the term of the loan), your dependents can also impact your borrowing capacity.
#2 Find the best interest rate. Banks care about profit margins for their shareholders, so will generally not offer you their very best rate upfront. Shop around to make sure you secure the best deal. This is where a mortgage broker can really save you time; they will find the best deal based on your specific needs.
Regardless of the rate you secure, ensure you will be able to comfortably meet your repayments if interest rates go up (base on up to 2% increase).
#3 Choose the right product. How do you know you are on the right product to achieve your wealth creation goals? It is important that you research the products available to determine which meet the requirements of your investment strategy.
A low interest rate is important but securing the lowest rate will likely mean forfeiting other features that may be important to your situation such as the ability to make extra repayments when you want to.
#4 Avoid cross securitisation: Cross securitisation involves combining all of your properties in a single structure with one lender, and using the combined collateral to fund further investments. This structure benefits the lender by providing it with greater security should you fall into financial hardship or should you try to manipulate your portfolio either by purchase or sale. For the investor however having all properties tied up in a single structure can be a major disadvantage by reducing borrowing capacity and the ability to find better deals with other providers.
Avoid cross securitisation by separating your properties into standalone structures. Implementing a standalone structure for each property means that if one property increases in value it won’t be held down by another that may have decreased in value. You will still be in a position to build your portfolio by using a line of credit against the property which has generated equity.
#5 Diversify your lenders to secure the best deals – but be aware of fees. Further to #4, standalone loan structures give you the flexibility to take out loans with different lenders to secure the best deals available in the current marketplace. This is a great strategy on paper, but for big portfolios with substantial debt this usually results in more than one set of fees and higher interest rates overall. Compare the fees and rates of standalone structures within one lender with the rates and fees that would be payable across multiple lenders to find the most cost effective option.
Finance brokers who are property investment focused act as you’re representative to ensure the right loan, structure and rate is secured not only for a single purchase but with your ongoing portfolio growth goals in mind.
How to avoid the top 4 mistakes, made by beginner investors
There are many potential pitfalls and challenges along the road to property investment success.
The advantage of being a novice investor in today’s world is that plenty of others have already made the mistakes for you. Learn from these simple yet common mistakes and investment portfolio will be off with a running start.
Mistake #1: Not having a plan! Get started as quickly as you can but make sure you have a clear strategy. Property is typically seen in Australia as a stable investment but unfortunately this doesn’t mean that just by purchasing any property you will generate a sufficient return. Property type, location, rental yield and growth prospects must be matched to your objectives. Investing in the right property is the foundation of a successful portfolio; consider if it will earn you a regular profit or leave you out of pocket and it’s ability to enable you to invest again within 12 to 18 months.
How to avoid it: Firstly, start by clarifying your goals. What do you want your investments to do for you? Do you want them to enable you to retire early? Fund an overseas holiday every year? Build your dream home? How much income do you need your investments to generate for you to reach your goals? Once you have this information, enlist the advice of a property strategist. They will match your personal situation and goals to properties that will help you achieve them.
Mistake #2: Failing to maximise your borrowing position. This is one of the biggest obstacles to rapid portfolio development. Many investors are attracted to the simplicity of dealing with their usual bank. They fail to realise how much their borrowing capacity can be affected by dealing with a single lender and how much it can differ between lenders.
How to avoid it: Shop around for a proactive mortgage broker who specialises in property investment. Along with your mentor, they will become a critical part of your investment ‘team’ – and the best part, they don’t cost you anything.
Mistake #3: Trying to self-manage a property in a location where you don’t reside. The best investment opportunities are unlikely to be close to where you live. To maximise returns and mitigate risk you need to take a nationwide and diversified approach. This often means holding property thousands of kilometres away from where you live. Trying to self-manage to avoid agent fees all too often ends in disaster. Unpaid rent and a poorly maintained property will soon cancel out any savings you have made on agent fees.
How to avoid it: Use the local experts. A good property manager won’t feel like a drain on your return. They will have a good corporate leasing client base, know how you can achieve top rent and most importantly, provide you with piece of mind that your asset is being well managed and maintained.
Mistake #4: Lack of long-term support. It is very easy to get ‘lost’ on your investment journey. It requires a disciplined, business-like and persistent approach. A lack of support in these areas is why many give up if things don’t go exactly to plan.
How to avoid it: Like a mortgage broker, an investment strategist or coach is a vital element of your support team. These are the people who have done it all before, and very successfully. They will provide ongoing assistance to ensure you stay on track, maintain motivation and reach your objectives.
Make the most of the professional services available to you. Taking advantage of these resources and learning from others’ mistakes will ensure you’re in the best position possible to maximise and fast-track your success.