How to grow a multi-million dollar portfolio on an average income

Discussion in 'Property Finance' started by Redom, 4th Mar, 2015.

  1. Redom

    Redom Mortgage Broker

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    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
     
    Last edited: 4th Mar, 2015
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  2. Xenia IM

    Xenia IM Property Manager

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    Thank you Redom
     
  3. albanga

    albanga Member

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    What a fantastic, well explained post.
    I think it covers a lot of recurring questions asked on these boards.
    Sticky!
     
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  4. hugh72

    hugh72 Member

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    Thanks Redom, that was interesting reading
     
  5. alexm

    alexm Member

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    Great post Redom. I always enjoy reading your commentary - very insightful. Keep it up!
     
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  6. Brady

    Brady Big 4 Banker

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    Hat off to you for sharing and writing this post. Whilst those in business on this forum like to keep their tips to themselves on this forum (eg. peaches) maybe thinking it will generate them more business, actively sharing knowledge like this going to do yourself better IMO. Kudos
     
  7. neK

    neK Member

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    Thanks for sharing this information Redom.

    Also, who do you deem to be the "foundation" lenders?
     
  8. Jamie M

    Jamie M Mortgage Broker - Oz Wide

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    Generally speaking - it's those lenders that don't have very generous borrowing capacity calculators. They are the lenders that will assess the loan repayments you hold with other banks at higher than they actually are. Examples include CBA, ANZ, STG, etc.

    However - this is VERY general statement and not applicable to everyone. For instance, there's no point placing a new investor with one of these so called "foundation" lenders if they're not going to be able to pull out equity for their second property.

    Cheers

    Jamie
     
  9. Redom

    Redom Mortgage Broker

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    Lenders that have relatively conservative borrowing calculators. As Jamie mentioned, those that assess debts you hold with other institutions higher than your actual repayment.

    In relation to your second point, for a first time investor, the differences between borrowing capacities at the outset between lenders is relatively marginal (when you exclude ING out of the eqn!). As that investor grows and grows, the differences between what lenders are willing to lend to you are stark.

    Definitely worth keeping in mind how you'll fund deposits and how you'll release equity.

    Cheers,
    Redom
     
  10. dajackal

    dajackal Member

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    CBA pricing request just got rejected....currently on 4.45% (1.2% off SVR for ~$2M loans)....and they wouldn't budget even though NAB are doing 4.25%/4.30%/4.38%. Thinking of refinancing with NAB.

    If I move from CBA, being a "foundation" lender, will that kill my ability to get finance going forward?
     
  11. Brady

    Brady Big 4 Banker

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    How many properties?

    Make sure you weigh up the costs. CBA Discharge $350, govt ~$300, settlement with new bank ~$200 per property close to $1k per property.
     
  12. Redom

    Redom Mortgage Broker

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    Hmm that's surprising they won't go down lower than that given competitors - did you speak to retentions? Perhaps give Brady a buzz and see if he can hook you up.

    I generally wouldn't suggest moving on price alone given they tend to fight it out. Are you <80% LVR?

    In terms of lender choice, depending on your goals (are you still looking to accumulate large amounts?) going to NAB shouldn't be the end of the world. I mentioned a few others that have similar serviceability policies to NAB in my post - there's a few you could alternate with. Depending on your circumstances (income profile), serviceability may not be an issue for you.

    Cheers,
    Redom
     
  13. Brady

    Brady Big 4 Banker

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    CBA have been pretty tight on pricing existing funds at the moment. Also haven't seen too much discount over 1.2% recently.

    Pricing is like a tap at times, sometimes it flows other times struggle to get a drop.

    New funds I managed to get 1.15% Discount on 90% LVR for $280k nearly fell off my chair.
     
  14. Redom

    Redom Mortgage Broker

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    Haha, that would've been one happy customer!

    Its not just CBA, the other majors are similar. NAB tend to consistently beat the others I find, or are willing to accept lower margins.

    Cheers,
    Redom
     
  15. dajackal

    dajackal Member

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    5 properties all < 80% LVR. So assuming I can qualify for 4.3% at NAB I'll be able to save ~$3K/year. But if it's going to cost me $1K per property to bring it across it doesn't feel worth it.

    I'm only looking to add one or two more properties to my portfolio and I'm done for my accumulation phase. Also, I don't think I'm nearing my serviceability wall yet.
     
  16. Redom

    Redom Mortgage Broker

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    Hmm, it'll cost a bit less than $1k per property. Plenty of banks have refinance offers going on too.

    Given where your at, then going to NAB shouldn't matter at all for your overall lending profile.

    Cheers,
    Redom
     
  17. JameZ

    JameZ Member

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    Kudos, utter most respect for you Redom at your willingness to share your brokerage knowledge to the general public.
     
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  18. Peter_Tersteeg

    Peter_Tersteeg Finance broker/strategist

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    Can I quote this on my next pricing request? Are you sure they didn't put an extra zero in the loan amount?
     
  19. Jamie M

    Jamie M Mortgage Broker - Oz Wide

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    haha - I wonder if they stuffed up? Maybe they were churning out 1.15% approvals and slipped up with this one. Either way - sweet result.

    Cheers

    Jamie
     
  20. Brady

    Brady Big 4 Banker

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    Sorry. Just went back and double checked, wrong info provided. Correct info below. Was a few there.

    $350,000 @ 90% LVR 1.10%

    $275,000 @ 90% LVR 1.05%

    $250,000 @ <80% LVR 1.05%


    The $280k @ 90% LVR w/ 1.15% discount was new funds but had existing funds which got the balance up over $750k.

    Crazy thing other discounts have only come back @ 1% or below for $300-400k when @ 80% go figure.