Advice on purchase of flats

[paul2k]

Is purchasing a block of flats a silly thing especially on property finance side?

Hi all,
I have be a reader of this forum for the last 3 months and I’m in serious need of some advice on the investments of a block of flats a friend told me was a good investment. I did my sums on the return but left out the most important detail which is the finance.

I have a PPOR worth $240k with no debts, a LOC of $60k and settling on a the block of flats which cost $400k. Here is the crunch, the bank (NAB business) would only loan me up to 70% of the property.

My calculations had costed 80% LVR and not 70%. Stamp duty is $20k and I have been reading up on how to purchase a property but forgot to read the how much $ can borrow section. I have picked up the correct property as it is going up but just realize what a corner I have put myself into with the finance.

I have $40k set aside for the deposit however I feel that my situation requires a financial wizard to assist me in the quest which is due in 2 weeks time.

 

[geoffw]

Paul,

I've had the same problem, from the same bank.

I don't know about you, but for me the problem was that, although the NAB allowed it as a residential, the Loan Mortgage insurance (LMI) people regarded it as commercial, so would not let more than a 70% lend. Even if you're within the 80% LVR, the LMI people MAY still be coming into the equation.

My personal banker was able to swing something for me by using personal guarantees on my other properties. I'm not sure how that worked- but I was looking at a 90% lend and paying LMI- the way he did saved me LMI. I'll PM his details.

Other than that- I'll leave it to the mortgage brokers to see if they can swing you a deal in the time needed.

Or you may be able to go higher that 80% LVR on another property providing the security, and pay LMI?

Good luck

Geoff

 

[Rolf Latham]

Hi P2K

Assumptions often lead astray.............. I think you will be very hard pressed for an 80 % lend if NAB wont do it.

If there were 4 on one title STG might look at it, but its Darwin as well which isnt regarded favourably by many funders.

The rtn better be good if youre tying up 30 % of capital.

The numbers say you can do it with the equity you have................................... 240 k ppor, with 60 k loc darwn leaves 132. You only need 120 + costs

ta

rolf

 

[geoffw]

but its Darwin as well which isnt regarded favourably by many funders

Darwin? Did you read between lines there Rolf?

 

[paul2k]

Originally posted by geoffw
Darwin? Did you read between lines there Rolf?

Oh,
I just email Rolf on the same issue but put Darwin on it.

By the way Rolf, further investigation tells me that my other option could also be increasing the LOC on the PPOR. As mentioned by Aceyducey somewhere else in this forum

"With a normal home loan you use the loan when it is established to buy a property. A LOC is set-up to a specified limit and you can then draw out funds from it up to this limit."

The question they were asking me is what are you going to do with the $100k? So do I infrom that that it's for a property investment as I want both loans to be separate and not tied together.

regards

Paul

 

[Rolf Latham]

Hiya Paul

Thas what I have suggested with the new 132 extra limit, BUT id be really concerned with locking up ALL my equity for the one deal.

ta

rolf

 

[paul2k]

Originally posted by Rolf Latham
Hiya Paul
Thas what I have suggested with the new 132 extra limit, BUT id be really concerned with locking up ALL my equity for the one deal.
rolf

Thanks Rolf. It's done now so all is fine. My lesson is to also pay more attention to the finance side of things.

Does you or anyone have any suggestions as to where on this board I can start?

By the way, this is the most helpful board and I will make it a point to contribute in the future....

My next plan is to wait for capital growth then re-value the IP so I could reduce that risk to my PPOR.

regards

paul

 

[always_learning]

waiting for capital growth, dont forget that paying down debt also works

 

[bundy1964]

Originally posted by always_learning
waiting for capital growth, dont forget that paying down debt also works

I think parking it in an offset account works even better

bundy

 

[always_learning]

Gosh money is so flexible and handy to have

... money money money, must be funny, in the richmans world...all the things I could do....if I had a little money...
-ABBA

 

[Carolyn]

Paul2k

Finance was a challenge for us when we bought both our blocks of flats. If they are under one title it makes your choices limited , but possible - try Bank of Queensland, GE and I think HKB. We were able to get 80% through these guys. GE are very quick and my expereince with them has been very good, but do have to pay higher rates.

(help i don't know how to quote)...but you mentioned about "waiting for capitol growth"... is there the opportunity to create that growth yourself through cosmetic renovations, adding carports, air cond, increasing rents? You could also investigate if you can strata title them and have them revalued to get back your equity? Be aware that strata titling may also increase your rates . It also allows you the flexibility to sell one if you need to and have more choices when you refinance.

Do some searches in the archives as there are previous threads on this issue.

Carolyn

 

[geoffw]

Paul,

The strata title mentioned by Carolyn is a good option to look into.

One thing it may may give you is the option to borrow to 80%, not just the 70% you are limited to know.

Just a word of warning though.

If you are going to add value, NAB appear to have introduced a policy where they will not revalue a property within 12 months of their previous valuation.

Also check out the market for furnishing- in my area I've done well by furnishing units in my block. But you have to know whether there's a demand before you proceed. We've checked the demand by putting an ad online before we proceed with spending on the furnishing.

 

[paul2k]

Carolyn & Geoff,
thank you for the advice. The units are under one title which is great. The NAB 1 yr rule is silly but I’ll ask the bank if it’s possible to revalue within a year if I strata title the units.

I have got a list of bank approved valuers too so thanks for everyone else’s advice too.

This is a great help and I’ll put forth the results of my finding with nab.

Regards

Paul

Originally posted by geoffw
Paul,

The strata title mentioned by Carolyn is a good option to look into.

One thing it may may give you is the option to borrow to 80%, not just the 70% you are limited to know.

Just a word of warning though.

If you are going to add value, NAB appear to have introduced a policy where they will not revalue a property within 12 months of their previous valuation.

Also check out the market for furnishing- in my area I've done well by furnishing units in my block. But you have to know whether there's a demand before you proceed. We've checked the demand by putting an ad online before we proceed with spending on the furnishing.

 

[JPM]

Hi all,


Bank of Qld would only loan us 70% against our block of flats. At the time I talked with a couple of banks (including HSBC) and along with some advice from Rolf, all these people advised that 70% would be max. Luckily we had other equity and we financed 105% of purchase price.

Geoff's comments about furniture is spot on for our area. We offer ours fully furnished or not (tenants choice) but we charge the same (higher)rent regardless. All our tenants except 2 (we have a block of 14) have chosen the furniture option and we have a waiting list of willing tenants. Other places around (which are unfurnished) are advertising in the paper everyweek and can't seem to get tenants. Through various circumstances we have had 3 tenants move out in the past 2 weeks and have had tenants move in STRAIGHT AWAY each time. And as we have a good deal with our PM, we do not pay any re-letting fee so no loss or rent!!!!

Only problem I have found so far with the finance side of things is that since the value has risen the bank says if I want to access the equity I need to organise an overdraft. Thankfully we have other available equity and we don't need this one at this stage BUT......

Original purcase price was $740K (in april 2003) and most recent appraisal was $1.3 mil(dec 2003). And as the 14 are split into 3 blocks with each on it's own quarter acre we have been given an estimate of $1.7mil if we split them up. So as you can see we will need to re-organize the finance side of things soon!!

So to sum it up. Stick with it Paul2K as blocks of units can be a most financially rewarding form of property investment.

Regards,
Jason

 

[geoffw]

Originally posted by JPM
Original purcase price was $740K (in april 2003) and most recent appraisal was $1.3 mil(dec 2003). And as the 14 are split into 3 blocks with each on it's own quarter acre we have been given an estimate of $1.7mil if we split them up. So as you can see we will need to re-organize the finance side of things soon!!

Wow, fantastic result Jason.Mine only went from $480K to $744K in 16 months.

Paul, in NSW at least, there are restrictions about strata titles- so check out before you make definite plans. My block, for instance, will need fireproofing between the units under the floors. My rates will be substantially more than they are now, so I'm not heading in that direction just yet.

 

[skater]

Hi

Just check out the rates issue that Geoff mentioned as it differs with each council area. I have a block of 4 strata titled units and the council charges rates as if they had not been strata-ed. I just have to send a stat dec each year to say they are all still owned by me.

Cheers

 

[JPM]

Hi,

Yeah Geoff is right about the rates. If we strata'd ours it would cost a fortune to hold. Also fireproofing would be an issue.

But therein lies the beauty of this property as it is 3 seperate blocks so fireproofing is not an issue and the rates are a little bit more acceptable than if they were 14 individual strata's

Geoff,
Gross rent is around $95K per year. All double brick. Colourbond roof. So major problems are not an issue compared to a lot of similar properties around here. Walk to town, walk to Uni, Walk to pub, walk to shopping, Self contained, each has garage,etc....

Had a person ring me up last night asking if there was one available. And I don't even manage it, well I mow the lawn!!

Can you believe I got him down from $880K????

The capital growth sounds a lot (which it is!) but nearly all my properties have risen 100% in the past 12 months. So it's not out of the ordinary for here.

Regards,
Jason

 

[paul2k]

Hi JPM & everyone,
Thanks for the feed back. I am still a bit unclear about accessing the equity once it has risen.

I was under the impression that you revalue your IP say 6 months - 1 year even after a simple coat of paint and bingo, if you buy right, then the valuation should be higher.

Can I ask then why would the bank insist on Overdraft instead of setting the loan up as a LOC?

My intent is to pull my capital out when capital risen 30% or at least have each IP secure against itself.

regards

Paul

 

[Aceyducey]

paul2k,

At a guess - it may be because the property is seen as commercial (hence only 70% lends).

Cheers,

Aceyducey

 

[geoffw]

Originally posted by paul2k
Can I ask then why would the bank insist on Overdraft instead of setting the loan up as a LOC?

I'm not quite sure what has happened here. Did you mention the overdraft, but I missed it?

I have an overdraft facility available to me, but for just $10K, and at 10% (well, that was before rate rises). So I don't wish to use it.

What are the rates and conditions for their suggested overdraft?

There may be other alternatives- see a broker on this forum, quickly

Regarding a reval. I don't know if you have clarified with NAB about a reval less than 12 months. I'd be delighted to know that they would waive that policy- or even if it is not a policy generally, but for some areas. I'm champing at the bit to move on, but I can't for now.