For those interested, I thought it was worth sharing some principles that allows investors on average incomes to grow multi-million dollar portfolios. The most common response I get when I talk about borrowing power with clients in todays low rate environment is a sense of shock/excitement after planning their finances and seeing how far they can really go.
I should caution the below with what banks are willing to lend to you and what you can afford may be two separate numbers. Having appropriate buffers/insurance in place is necessary, especially as the portfolio grows larger.
So, how does someone on an average income grow a multi-million dollar portfolio?
In the main, it comes down to:
1. 'Ordering your lenders' appropriately and switching lenders at the right times. One of the more common pitfalls is going direct to the same bank and thinking the party's over once they say no. In reality, if you're at this point, the party's likely to be only starting out for you.
2. Protecting your borrowing power: Being educated about what impacts your borrowing ability early will allow you to 'maximise' your borrowing power and get you to the extremes of where you can go. You'll also need to keep your credit file clean.
3. Purchasing at decent yields (6%): By doing so, and swapping lenders, you can actually increase your borrowing power for your later purchases.
Doing the above 3, someone on an average income has the borrowing power to grow a very large portfolio.
Breaking it down
Imagine you?re a new investor looking for your first investment property and work out that you have a borrowing power of say $500,000 with most lenders. You then go to ANZ/Westpac/CBA and purchase your first place with a 6% yield. You've started.
After you've gone and purchased a property for $500,000 and soaked up this borrowing power, if you go back to the same bank, your borrowing power with the same bank is likely to be around ~$350,000-$400,000. While it is common thinking that you need to purchase at a 8.5%+ yield to improve your borrowing capacity, this is only true if you STAY with the same bank.
However, if you moved to another bank that takes your existing debt at your actual repayment, your borrowing power may in fact be $520,000 - higher than it was originally despite a relatively achievable yield!
Getting a bit technical (for those that love numbers!), banks calculate your borrowing power by comparing your income to your assessed expenses. They then get to an overall 'surplus' figure and base your overall borrowing capacity on this 'surplus' number. Now if you've already purchased at a 6% yield and are paying a 4.5% interest only repayment, your borrowing power may INCREASE from your original calculations (bear in mind that only 80% of rental income can generally be used).
Panning this concept out
For an entire property portfolio, you can now form a strategy/plan to extract as much borrowing power as possible. In general, to maximise your borrowing power, start by borrowing as much as possible from lenders that treat debts held with them vs debts with other banks similarly (foundation lenders). Then swap to a slightly more generous lender that adds a small loading (CBA for example). Finally, you move between the following 6-7 lenders that take debts at actual repayments: AMP, Firstmac, MEbank, Adelaide?s funding line, Macquarie or NAB.
To maximise this approach, bear in mind that some of these lenders have quirky policies to those with large portfolios ('rent reliance' policies) which can rule them out. Some aren't that friendly for complex/deep portfolios (MEbank), so they can be ruled out too. AMP need to be used before you've hit 10 properties. Firstmac will only use 70% of rental income for deeper portfolios.
This leaves NAB and Macquarie. The two lenders brokers on the forums keep saying to 'keep up your sleeve' until needed. Note NAB credit score, which may be tricky to navigate around for those repeat investors.
For simplicities sake, I've excluded the ability to generate 'deposits' from the equation altogether. This obviously is a key element to growing a portfolio and has its own considerations.
Realistically, you're likely to need to release equity from your foundation properties over time. Soon enough, you won't be able to borrow any more from your 'foundation lenders'. This will likely mean refinances from your early lenders to your later lenders.
Furthermore, everyone's situation is different and have their own personal quirks in employment, securities, income, etc. This will mean you may need to choose certain lenders.
As others have pointed out in other threads, there's no silver bullet to all of this this. The above is just a generalised roadmap designed to educate how someone grows a large portfolio with an average salary.
Cheers,
Redom
I should caution the below with what banks are willing to lend to you and what you can afford may be two separate numbers. Having appropriate buffers/insurance in place is necessary, especially as the portfolio grows larger.
So, how does someone on an average income grow a multi-million dollar portfolio?
In the main, it comes down to:
1. 'Ordering your lenders' appropriately and switching lenders at the right times. One of the more common pitfalls is going direct to the same bank and thinking the party's over once they say no. In reality, if you're at this point, the party's likely to be only starting out for you.
2. Protecting your borrowing power: Being educated about what impacts your borrowing ability early will allow you to 'maximise' your borrowing power and get you to the extremes of where you can go. You'll also need to keep your credit file clean.
3. Purchasing at decent yields (6%): By doing so, and swapping lenders, you can actually increase your borrowing power for your later purchases.
Doing the above 3, someone on an average income has the borrowing power to grow a very large portfolio.
Breaking it down
Imagine you?re a new investor looking for your first investment property and work out that you have a borrowing power of say $500,000 with most lenders. You then go to ANZ/Westpac/CBA and purchase your first place with a 6% yield. You've started.
After you've gone and purchased a property for $500,000 and soaked up this borrowing power, if you go back to the same bank, your borrowing power with the same bank is likely to be around ~$350,000-$400,000. While it is common thinking that you need to purchase at a 8.5%+ yield to improve your borrowing capacity, this is only true if you STAY with the same bank.
However, if you moved to another bank that takes your existing debt at your actual repayment, your borrowing power may in fact be $520,000 - higher than it was originally despite a relatively achievable yield!
Getting a bit technical (for those that love numbers!), banks calculate your borrowing power by comparing your income to your assessed expenses. They then get to an overall 'surplus' figure and base your overall borrowing capacity on this 'surplus' number. Now if you've already purchased at a 6% yield and are paying a 4.5% interest only repayment, your borrowing power may INCREASE from your original calculations (bear in mind that only 80% of rental income can generally be used).
Panning this concept out
For an entire property portfolio, you can now form a strategy/plan to extract as much borrowing power as possible. In general, to maximise your borrowing power, start by borrowing as much as possible from lenders that treat debts held with them vs debts with other banks similarly (foundation lenders). Then swap to a slightly more generous lender that adds a small loading (CBA for example). Finally, you move between the following 6-7 lenders that take debts at actual repayments: AMP, Firstmac, MEbank, Adelaide?s funding line, Macquarie or NAB.
To maximise this approach, bear in mind that some of these lenders have quirky policies to those with large portfolios ('rent reliance' policies) which can rule them out. Some aren't that friendly for complex/deep portfolios (MEbank), so they can be ruled out too. AMP need to be used before you've hit 10 properties. Firstmac will only use 70% of rental income for deeper portfolios.
This leaves NAB and Macquarie. The two lenders brokers on the forums keep saying to 'keep up your sleeve' until needed. Note NAB credit score, which may be tricky to navigate around for those repeat investors.
For simplicities sake, I've excluded the ability to generate 'deposits' from the equation altogether. This obviously is a key element to growing a portfolio and has its own considerations.
Realistically, you're likely to need to release equity from your foundation properties over time. Soon enough, you won't be able to borrow any more from your 'foundation lenders'. This will likely mean refinances from your early lenders to your later lenders.
Furthermore, everyone's situation is different and have their own personal quirks in employment, securities, income, etc. This will mean you may need to choose certain lenders.
As others have pointed out in other threads, there's no silver bullet to all of this this. The above is just a generalised roadmap designed to educate how someone grows a large portfolio with an average salary.
Cheers,
Redom
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