Financing Buy/reno/sell's

[cajam]

I am trying to work out the feasability of doing buy/reno/sell's as a business. I am wondering how you approach a lender if your income comes from the the sale of property. How do they feel about you wanting a loan for the purpose of selling the property after a short period of time (2-6 months).

I imagine they would like to see a history of such ventures that you have completed successfully and there would need to be a larger deposit requirement than normal - at least 80% LVR?

How about flexible financiers requiring less documentation?

All comments appreciated.

Cam

 

[karsal]

HI Cam.

As with any business, banks will want 2 years history.

Personally, I have continued to work full time and am cashing up to have enough to do it full time. Target is end of 2003.
I had to go back to work to show income for the buggers!

What I have found is that the best way to start (current income disclosure is for 90% lvr buy and holds. Keeps LMI happy), is to have 20% plus costs plus reno costs.
I am using a Macquarie no doc loan @ 6.9%, no questions asked.
Naturally, there are break out costs, but it's still better than doing nothing.

For reno, I try and pay for most things on the visa card, and earn myself the odd holiday along the way.

If you have sufficient equity then this may be the way to go.
Remember that if you are doing this full time, then you will need some extra cash to pay the bills along the way as it can be a slow process from when you settle, to when you sell and settle.

Hope this helps, and well done on having a go.

Cheers,
Sam.

 

[cajam]

Sam

>I am using a Macquarie no doc loan @ 6.9%, no questions asked.
Naturally, there are break out costs, but it's still better than doing nothing.

The magic words are no questions asked - this sounds like the way to go as I am planning on providing 20% deposit + costs. I'll have to check out some products.

Thanks,
Cam

 

[Michael Croft]

Hi,

After you've done a few I've found an LOC secured against another property works best for me. Originally this was against my PPOR and now this is against investment property.

The LOC makes life easy as it is the deposit, purchase and funding for renos. Without a mortgage on the reno property life is a hell of a lot easier and quick settlements mean better buy prices.

The other thing the LOC does is allows you to finance the reno after it's complete which equates to better leverage and on to the next one - that's if you plan to keep a few. Even with Low Doc's it is possible to keep every third reno when starting out AND done right.

regards,

Michael Croft

 

[cajam]

Michael

thanks for the tips
From the calculations I have done I found that by keeping a property you can only get back your outlay, there isnt much profit in it at all (i use the word profit loosley as the equity you have built is still substantial). From what you have said you have given me confirmation 3buy to 1 hold. However, I recieved a clue from an ip spreadsheet i downloaded from one of the members of the forum. They used the assumption that you can access 90% of the value of a property less dept. If this is true it greatley improves the cash position if you buy/reno/hold. In fact it almost doubled the available cash when I put it into my calculations. As I am just starting out, this would greatley improve my portfolio growth (and living standards!), in your experience have you come across such an LVR level for attaining a LOC.

thanks
Cam

 

[geoffw]

Cam,

Yes, you can borrow to 90%- but you may well incur an extra expense- loan mortgage insurance (LMI). When you borrow above 80%, the banks will want to limit their risk, and it's probable that they will charge an extra amount.

This amount can run into thousands, so it's not insiginificant.

A few points.

.It can be very worth while to incur this extra cost. It's a higher risk, but it's up to you as to the risk you're comfortable with. You can end up being able to borrow a lot more.

.If you do it the way Michael suggests, you limit your LMI. The first IP I bought, I was young (wll, not really) and inexperienced (really)- and instead of a LOC (I did not have a forum like this), I took out a second mortgage against my PPOR. The LMI was assessed against combined value of both properties.

.If your borrowing is not far above 80%- try to get the extra amount to bring down the percentage. On our PPOR, we reduced the LMI from $2,000 to nothing by borrowing another $4,000 (some on credit card). Interest on $4,000 was lots better off than a $2,000 payment.

.My bank, at least, calculates LMI on fixed increments. If you borrow 89.9%, the cost is a lot lower than borrowing 90%.

 

[Rolf Latham]

Hi GW

Tsk Tsk, a 90 % lend with LMI a bigger risk ? Only to the lender and the LMI provider. If you can afford to borrow 90 instead of 80 the extra 10 sitting in your offset is a nice buffer.

But then we all have different views :O), and yes the cost can be between 1.3 to 2.5 % of the loan amount, some lenders will allow you to add the LMI to the loan.

Agree with you on all else.

Ta

Rolf

 

[geoffw]

Tsk Tsk, a 90 % lend with LMI a bigger risk

Rolf,

Yes, when a partner does not support more borrowings, it's more of a perceived bigger risk- rather than an actual risk.

The "SANF" (sleep at night factor) is much lower for my partner borrowing 80%.

I'd be happy borrowing to 95% if I could do it. But my conscience (aka MrsW) would not allow it. And the LMI would become huge

 

[Rolf Latham]

Hiya GW

Easy fix GW, I was unclear in my comment, I didnt say you spend the extra borrowings if you are flighty. Rather, you park the extra dough as security or future opportunity.

Imagine you suffer financial stress for whatever reason. Try going back to the bank to pull your equity after retrenchment or open heart surgery - aint gonna happen. Banks like to give you an umbrella - until it rains.

Granted, there is a cost, all risk management costs money. The cost depending on the lender on a capitalised deal of say 200 000 would be a deductible 6 dollars a week for an extra 30 000 available cash safety margin. Youre going to have to work real hard to convince me thats not a good idea if you have much or are planning much exposure.

ta

Rolf

 

[cajam]

Sorry i need to clarify a bit.

Scenario:
Joe Blogs has bought a property and renovated it. He has increased his equity to an LVR of around 60 loan:40 equity. He now wants to access as much equity as he can to buy another property and repeat the process.

My question is - can you get the loan refinanced through a Line Of Credit facility or the like to a level greater than the normal 80:20 LVR. Is it possiple to get an 90:10 LVR so Joe Blogs or I can access a greater chunk of equity for the next venture.

Thanks for the interesting responses given

Cam

 

[Jamie]

Hi Cam,

I think Rolf will have the answer to this one. Ive emailed him before re the same sort of scenario and he had the answers. ANZ will go to 85% (Rolf?) but there are smaller lenders (Medine in VIC I think) who have gotten through 95% LOCs on reval.

As I said, these are just my vague rememberings of something Rolf mentioned.

Jamie.

 

[geoffw]

Originally posted by cajam
Sorry i need to clarify a bit.

Scenario:
Joe Blogs has bought a property and renovated it. He has increased his equity to an LVR of around 60 loan:40 equity. He now wants to access as much equity as he can to buy another property and repeat the process.

My question is - can you get the loan refinanced through a Line Of Credit facility or the like to a level greater than the normal 80:20 LVR. Is it possiple to get an 90:10 LVR so Joe Blogs or I can access a greater chunk of equity for the next venture.

Thanks for the interesting responses given

Cam

Cam,

There's two ways you could refinance

Assume $500,000 property, 40% equity.

Scenario 1. Cross collaterise. Borrow 90% against combined value of old and new property. At 90%, you would theoretically be able to borrow $2M. Except that
1. Cross collat does put a risk on your own home
2.Mortgage insurance is calculated on combined value of your own home plus IPs. That comes out at a very big amount. Best guess $30K? That would reduce your borrowings.

Scenario 2. Take LOC of 80% against home to purchase new IP. You have $100K available as deposit. You can borrow $1M on 10% deposit. Lower, but your house is not at risk. LMI is lower. Or even go to 95%. I'm not sure about LMI at that level- Peter Spann is suggesting that this is too high a level in this environment.

I'vejust put something in as a comparison. Other factors, such as acquisition costs, will make a (big) difference.

I've been through both scenarios. I would only do #1 again if the property was REALLY worth it. Like an opportunity which landed out of the air. I would not plan for it. #2 wasa much better way for me when the opportunity came.

 

[Rolf Latham]

Hiya

Just a quick qualification on differences between LOC and Term loan when refinancing.

Most Lenders LOCs will only go to 80, some 85 and a few to 90 %, but wiht quite low $ limits.

Usually you are bets off refinancing to a term loan with most lenders to get the 90 %, because some (like CBA and ANZ) will generally not go beyond 80 for LOCs.

ta


Rolf