Financial Strategy...How to borrow more without overstretching !!

[aviena]

I've read quite a few posts with people asking/advising to have a clear financial strategy. I was wondering if someone could share some of the Strategies currently being used. How individuals go onto build a property portfolio based on the equity and/or on a single meager income. Do they over stretch and over borrow from Banks or are there smarter ways of going about it?

To give you a background, we are a working couple with a decent combined income and stay in our own house. Have a chunk in savings and a recent reevaluation of house revealed an 30% appreciation. So have a decent chunk in equity. With intentions to buy our first IP, had a chat with Banks and easily qualify for a property around 650K. During the meeting with bank they also mentioned about how Loan exceeding 80% LVR attract higher fees, LMI etc etc. Wasn't clear on that bit. Hearing that it got me thinking, how do other individuals do it. Have read individuals who started with a nothing or on a meager single income but ended up with a good property portfolio.

Pretty sure many individual may have had the same query or new budding investors (like myself) still wondering. Was hoping if someone could provided some directions and cues on it.

 

[Rolf Latham]

To give you a background, we are a working couple with a decent combined income and stay in our own house. Have a chunk in savings and a recent reevaluation of house revealed an 30% appreciation. So have a decent chunk in equity. With intentions to buy our first IP, had a chat with Banks and easily qualify for a property around 650K. During the meeting with bank they also mentioned about how Loan exceeding 80% LVR attract higher fees, LMI etc etc. Wasn't clear on that bit.

Important to gte clarity.

If that banker at that branch cant or wont provide that clarity, find another banker or a broker that can take you through the discovery process BEYOND the current transaction.

Its not until you have a better idea on the end game of why you are doing and why. that you can clarity on what finance structure may work.

With clarity comes certainty, and thats a good place to be if you are spending 650 k ................

ta
rolf

 

[D.T.]

Over stretching to your definition or you bank's definition? They're usually much different because of the way they calculate things. Each person also has different circumstances and tolerance levels.

So, what you need to do is communicate the above to your broker (don't go to a bank if you want to buy multiple properties) and have them map out a path over what lenders you can use and in what order to keep ahead of the calcs.

I currently have 15 times my household income in debt. For some that's astonishing, but for other's (including me) its just getting started.

 

[aviena]

Important to gte clarity.

With clarity comes certainty, and thats a good place to be if you are spending 650 k ................

ta
rolf

Couldn't have agreed more on that point, have already taken up an appointment to flesh that bit out and understand it fully. Have also spoken to few brokers and got meetings lined up.

wouldn't be slugging myself with a 650k loan without fully knowing the minor details.

My general understanding is, individuals who go on to build a property portfolio do that by borrowing based on the equity of the their previously bought IP (provided they have some equity built up their).

My current plan is to buy the first IP (currently looking at Sydney Southwest Edmondson Park, Leppington or Oran Park) and a year later (once the First IP has appreciated in value) use the equity to take out a loan for the 2nd IP.

Are there any other better approach to achieve what i;m planning to do?

Thx.

 

[Michael_X]

Over stretching to your definition or you bank's definition? They're usually much different because of the way they calculate things. Each person also has different circumstances and tolerance levels.

So, what you need to do is communicate the above to your broker (don't go to a bank if you want to buy multiple properties) and have them map out a path over what lenders you can use and in what order to keep ahead of the calcs.

I currently have 15 times my household income in debt. For some that's astonishing, but for other's (including me) its just getting started.

Agree with DT here. If you want to build a portfolio recommend speaking to one of the brokers on Somersoft. A bank will only take you so far.

At the beginning of my journey I spoke to several brokers and asked them to map out my journey from 0-X properties, how it should be structured, which banks to use and when, and how far I can go etc

The broker who gave me the most structured and detailed response won my business

 

[Michael_X]

My current plan is to buy the first IP (currently looking at Sydney Southwest Edmondson Park, Leppington or Oran Park) and a year later (once the First IP has appreciated in value) use the equity to take out a loan for the 2nd IP.

Are there any other better approach to achieve what i;m planning to do?

What happens if Sydney Southwest plateaus? That would be the only concern with the above approach.

Perhaps look at some other areas too. There are quite a few threads on Brisbane & Adelaide as potential areas to invest.

Another approach could be a cosmetic reno to manufacture some sweat equity. I did this myself last year with a few renos and helped accelerate my acquisition phase.

 

[mflying]

I've read quite a few posts with people asking/advising to have a clear financial strategy. I was wondering if someone could share some of the Strategies currently being used. How individuals go onto build a property portfolio based on the equity and/or on a single meager income. Do they over stretch and over borrow from Banks or are there smarter ways of going about it?

To give you a background, we are a working couple with a decent combined income and stay in our own house. Have a chunk in savings and a recent reevaluation of house revealed an 30% appreciation. So have a decent chunk in equity. With intentions to buy our first IP, had a chat with Banks and easily qualify for a property around 650K. During the meeting with bank they also mentioned about how Loan exceeding 80% LVR attract higher fees, LMI etc etc. Wasn't clear on that bit. Hearing that it got me thinking, how do other individuals do it. Have read individuals who started with a nothing or on a meager single income but ended up with a good property portfolio.

Pretty sure many individual may have had the same query or new budding investors (like myself) still wondering. Was hoping if someone could provided some directions and cues on it.

As other said speak to a good broker from forum!

then, speak to some of forum members who have bought and sold in right markets.

Then, buy properties that you can manufacturer your own equity (buy properties that you can reno/ splitter/ small development)


Rinse and repeat!

i have done above and i can say it is going well so far!

 

[Terry_w]

My current plan is to buy the first IP (currently looking at Sydney Southwest Edmondson Park, Leppington or Oran Park) and a year later (once the First IP has appreciated in value) use the equity to take out a loan for the 2nd IP.

That is not a plan. It is like saying I am going to go to Asia next year for holiday - its a vague wish at this stage. Not a criticism, but you need to take this further.

 

[Redom]

Couldn't have agreed more on that point, have already taken up an appointment to flesh that bit out and understand it fully. Have also spoken to few brokers and got meetings lined up.

wouldn't be slugging myself with a 650k loan without fully knowing the minor details.

My general understanding is, individuals who go on to build a property portfolio do that by borrowing based on the equity of the their previously bought IP (provided they have some equity built up their).

My current plan is to buy the first IP (currently looking at Sydney Southwest Edmondson Park, Leppington or Oran Park) and a year later (once the First IP has appreciated in value) use the equity to take out a loan for the 2nd IP.

Are there any other better approach to achieve what i;m planning to do?

Thx.

Hi Aviena,

Sounds like you're coming off a really good base, a few things to add to the mix:

1) Size of the deposit: if you're looking to build an asset base quickly, then consider having smaller deposits and purchasing multiple IP's instead of using all your equity to fund one property. You'll have to pay some LMI, but it gets you in and a larger asset base working for you. For example, you can spend 100k and purchase a 500k property (80% LVR), or purchase 1 million worth of assets (90% LVR). The tax deductible LMI cost of doing so can be made up pretty quickly with relatively small capital gains.

2) I'd be very careful in my assumptions around capital growth. Recent capital growth (1-2 years) is NOT an accurate predictor of future capital growth (next 1-2 years). You're plan may sound great, but the timing of any equity gains may not be as quick as 12 months. For example, those that purchased in Brisbane five or six years ago are likely to have seen very little capital gains relative to someone who bought in Sydney 18 months ago. It may reverse completely in the next 5 years.

3) Ditto Rolf - have a plan, it will save you money in the long run and there'll be much that you may not know that good advisers will. Sit down with someone and build a finance plan built around your purchasing plan. Part of this plan will naturally involve changing lenders at different points in time. You can borrow by switching banks. My position likely makes me biased, but for this type of 'investor', a broker tends to suit over banker in the long run (not that necessary to begin with).

4) Goodluck!

Cheers,
Redom

 

[Jamie M]

As other said speak to a good broker from forum!

Hit up Rolfucius who provided a great initial response. He's a finance guru.

Cheers

Jamie

 

[albanga]

Your end goal will ultimately dictate your strategy so you should first establish what that is. For example are you getting into property because you want to retire with a CF+ portfolio? Do you want to accumulate a large asset base to cash out and invest your money into something more secure like the bank?

What timeframe are you giving yourself? The smaller the timeframe the less options you have and will likely need to adopt a strategy whereby you manufacture your gains (renovation, subdivision, development).

I think you first need to work out the end goal and then work backwards based on that. A good broker once they know this will then be able to align you with the right lenders.

 

[Jaggannath]

I currently have 15 times my household income in debt. For some that's astonishing, but for other's (including me) its just getting started.

You haven't mentioned the value of the underlying assets though relative to this debt

Your end goal will ultimately dictate your strategy so you should first establish what that is. For example are you getting into property because you want to retire with a CF+ portfolio? Do you want to accumulate a large asset base to cash out and invest your money into something more secure like the bank?

What timeframe are you giving yourself? The smaller the timeframe the less options you have and will likely need to adopt a strategy whereby you manufacture your gains (renovation, subdivision, development).

I think you first need to work out the end goal and then work backwards based on that.

This is the hardest part.

 

[D.T.]

You haven't mentioned the value of the underlying assets though relative to this debt

Its at about 90% LVR

 

[aviena]

Your end goal will ultimately dictate your strategy so you should first establish what that is. For example are you getting into property because you want to retire with a CF+ portfolio? Do you want to accumulate a large asset base to cash out and invest your money into something more secure like the bank?
.

Working out the end goal is challenging bit and I was after some ideas from the members of the forum. I liked the two options that you have presented in the example, which certainly has got me thinking and will keep in mind. Thank for the pointers. Feel free to share any other suggestion you may have followed, or seen others following but wished you had followed, or plan to follow. Cheers.

Timeframe wise, as I'm just starting out, currently I'm in for long term as I don't understand enough and have the clarity or strategic grip on finance/investment for Short term deals.

 

[aviena]

1) Size of the deposit: if you're looking to build an asset base quickly, then consider having smaller deposits and purchasing multiple IP's instead of using all your equity to fund one property.

Good point and noted. This idea did cross my mind and inclined towards hedging out my investments instead of 1 big bang investment but didn't know the WHY?. The inclination was purely based on gut feeling. Thanks for the reasoning.

2) I'd be very careful in my assumptions around capital growth.

Hmm, yes a valid point. Just because Sydney market is growing since the last 20 months or so that does not necessarily mean it will continue to grow (it will but may be not at this rate).

Will seek financial advice and pick their brains to formulate a Financial/Investment Plan.

Thank you .... Redom!!

 

[aviena]

What happens if Sydney Southwest plateaus? .

Hmm, could be a possibility esp with the number of new land releases and developments that are planned to occur over next few years. There could be a surplus of properties in Southwest. But then, we keep hearing how the population of Sydney is ever growing and will continue to grow at even faster pace. So in my opinion a matching demand may always be there. Time will tell.

Thanks!!

 

[albanga]

Working out the end goal is challenging bit and I was after some ideas from the members of the forum. I liked the two options that you have presented in the example, which certainly has got me thinking and will keep in mind. Thank for the pointers. Feel free to share any other suggestion you may have followed, or seen others following but wished you had followed, or plan to follow. Cheers.

Timeframe wise, as I'm just starting out, currently I'm in for long term as I don't understand enough and have the clarity or strategic grip on finance/investment for Short term deals.

If time is your friend then you definitely have options. Firstly how educated are you with some of the common strategies? If not very then I recommend spending a lot of time educating yourself.

For example you have income whereby you look to CF+ properties (regional towns) but growth is limited. There is buy and hold for growth which will have you buying in blue chip suburbs, the outlay will be greater and you will likely be negatively geared meaning your regular income will need to pay for the shortfall. You have manufactured growth (my personal strategy) whereby you do value add projects such as renos, subdivisions, developments but prepare to get your hands dirty and allow for going grey very early when dealing with councils if you plan on developing.

An example end goal might be "I want $100,000 annual pre tax income a year without working and I want to achieve this in 10 years". Well in order to do that you need to think about a return, so maybe you say in order to get that income I want to leave my money in a term deposit at 4%. Well in order to achieve that you would need a $2,500,000 asset base 4% * 2,500,000 / 100 = $100,000 (I think those calculations are correct ).

There is a lot more to consider than just this but just wanted to give you an idea. Do yourself a favor and pick up any number of good books which will give you atleast the basics on property. I started with Steve McKnights 1-135 (More CF+ focused) and recently read Margaret Lomas book which was a good easy read.