Increasing Portfolio

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From: Mike .


The second step is the hardest???
From: Bill
Date: 06 Sep 2000
Time: 12:03:25

Hi everyone

Firstly, well done to everyone for their ongoing contributions. I think this forum is brilliant and is a great way to share learnings so we can all achieve our goals! Now to a bit of an issue I would appreciate some advice on.

I’m looking to make the second step to expand our portfolio however am a bit confused as to my best options. Here goes with the details. We have 1 IP, secured by itself as well as a second mortgage over our home. I want to buy an additional property but am not sure as to my best options in terms of loan arrangements, minimising collateral, etc. I’ve done the rounds of the banks and am no clearer.

Here are the facts: One IP valued at $210, with $180 IO mortgage. Home value of $250 with $176 mortgage (not fully drawn, with $15 “up the sleeve”). As such assets of $460, loans of $356; LV of 77%. If we want to buy another IP, say $250 and borrow the lot with costs, say $270, we would have an asset base of $710, with liability of $626, being 88% LV. We are then hit for mortgage insurance as a start. My biggest concern is not MI. (Having said that, I’d rather not pay it. Does anyone know how much it would be, as I haven’t got a clear idea from brokers & banks I have spoken to? Do you only pay it once on loans?).

Rather, the bigger question is how do I set up No 2 and minimise the collateral? I’d like to have it secured 80% to itself and not as a third mortgage over our home and a second mortgage over IP No 1.

This is the biggest stumbling block I have found with the banks. The "can’t do" attitude is alive and well in the financial sector! Once I start talking these kinds of figures you can see "risk" written all over their face, as it is outside the confines of what they are normally used to dealing with. Affordability is not the key. I can make that part of it work if you follow Jan’s advice on the scenario to present to the banks.

That’s it. I’ve bared my soul!! I’d love to hear and learn from others on how I can best make that next step into no 2…and 3… and …..and……!!

Cheers, Bill

 

[WebBoard]

Owen

Reply: 1
From: Mike .


Re: The second step is the hardest???
From: Owen
Date: 08 Sep 2000
Time: 15:15:13

Hi Bill,

You can obviously work out your numbers OK and you seem to be pretty close to getting the LVR you need. A slight shuffle of figures and your there.

First thing - do everything in your power to pay off you homeloan ASAP. All income into 100% offset or LOC with a real budget in place. I paid off my place 3 months ago and the difference in cashflow, LVR and confidence can't be underestimated.

Second thing - where did you get the value of you current properties from? Are these gut feelings or bank valuations? From other entries on the forum the advise is to ensure you are personally at the valuations so you can ensure the valuer knows what numbers you need. On you current figures you need another $70K on your 2 existing properties to make the 80% LVR including your 2nd IP. Is it there?

Third thing - the only way you can secure an 80% LVR IP loan against the IP and have it standalone is by putting in a 20% deposit. That's a fact. Instead I have made my goal to remove our home from the cross collateralisation and having only the IP's linked to each other. That just takes capital growth. They can be refinanced later to break the links.

Fourth thing - You haven't mentioned anything about your income (rent or otherwise) for servicability. If you're borrowing the lot for IP2 you are going to be heavily negatively geared. Your 1st IP is returning requires $276pw rent to cover itself or it's also negatively geared. Still having a mortgage on your home plus 2 IP's negatively geared may be the risk the banks are seeing?

How does that sound? It may be hard but the banks may be saying that you can't stretch to a 2nd IP just yet. A change of focus onto your homeloan may have better rewards in the short term. Showing figures from software like PIA can help. I got told I could borrow enough because of servicability problems 3 months ago and I returned with a real property (not just an idea), full financial documentation, rental estimates from agents and a written version of my personal investment plan and goals and all of a sudden the money was there. I proved myself to them with real data. Let me know how you go.

Owen

 

[WebBoard]

Bill

Reply: 1.1
From: Mike .


Re: The second step is the hardest??? THANKS OWEN
From: Bill
Date: 20 Sep 2000
Time: 20:43:33

Thanks Owen for your advice. The deal is that the current IP is actually positively geared so affordability etc wise it is not really a big issue. I can make the numbers work however the old 'bank security' thing is the major headache. They want to take as much over everything as possible. Still working on it.... have quite a mortgage so have a long way to go but need to find a way to get into IP no.2.......

Bill

 

[WebBoard]

Les

Reply: 1.1.1
From: Mike .


Re: The second step is the hardest???
From: Les
Date: 24 Sep 2000
Time: 13:15:36

G'day Bill,

An interesting set of numbers indeed. One of your comments (below) had me intrigued:-

>> "Rather, the bigger question is how do I set up No 2 and minimise the collateral? I’d like to have it secured 80% to itself and not as a third mortgage over our home and a second mortgage over IP No 1."

Bill, my reaction to this was if you loaned $1000 to someone, would you like them promise to pay you back $800??? In other words, I wonder why you expect to have 80% of the mortgage on the new IP, and NOT have to mortgage the remainder on one of the other properties. Or do you have the remainder in cash available as a deposit???

In a nutshell, your new IP CAN have 80% set against it (subject to satisfactory valuation) - or 90% if you are happy to pay LMI. Using your figure of $270k on a $250k IP, that means a mortgage of $200k (80%) or $225k (90%) leaving $70k or $45k to find. You have $15k "up the sleeve" - but still need $30k (at 90%) from "somewhere" to make a purchase possible. (And note, I haven't added the LMI cost, so you maybe really need $34k).

So you're not far short - possibilities that pop into my head are:-

Vendor finance - find someone selling who will leave $30 - $40k in the property.

Buy "under market" (say 10% - 15%) and then find a lender who will lend to market value rather than "lesser of market value or contract price". (I've heard they're "out there" - but don't ask ME where - I haven't found one yet).

Borrow from parents ???

Need a holiday? Perhaps a Personal Loan (unsecured) can make the difference - warning here:- this would really be a "high geared" operation, not normally recommended. And you would need to have a fair amount of discretionary Income to ensure you wouldn't be stretched if bad things happened (like an Interest rate hike).

Or maybe it is just a bit soon for you to do this? Your call - hope this helps somewhat.

Regards, Les