Loan serviceability

[KT_Blues]

Hi All,

When looking at the property investors case studies in the magazine, you have people on 80K having portfolios of 5 million dollars in 5 years with the strategy 'buy & hold'. How do they do it? I understand equity, but equity is not liquid money.

Speaking with my bank, my understanding is that bank is looking at loan serviceability, and what would happen if rate went up or property market lost value.
So this means that your equity might go up, but there is a limit of how much bank would give you based on your wages.

In my example, bank said that although equity goes up, the maximum they would ever allow me to borrow on current income is 870K. Which is 3 properties (I have 2 already).

My properties might be generating income, or paying for themselves, but this is not taken into account.

 

[D.T.]

Easy.
By having a broker who understands how to implement your goals. You can borrow unlimited if you do it right, as long as you have the deposits (from either growth or sweat equity).

Rental income (and share dividends) are definitely helpful for your serviceability. Keeping your personal debts low is also instrumental.

 

[tj22]

once you hit the wall with one bank for serviceability go to the next?

 

[Qlds007]

Not quite as simple as going from one bank to another.

More a case of starting with the right lender and going from there.

Use up lenders with the poorest serviceability models first and keep your powder dry for when you need it.

 

[Peter_Tersteeg]

Building a portfolio of this size in that time frame requires a combination of both rental income and growth. Unfortunately it's often difficult to get both in the same property. It takes either a lot of luck or a lot of research and planning. In truth it's usually a bit of both, often it comes down to good timing.

I can assure you that all lenders take into account the rental income from both existing and proposed properties. Either the person you're speaking with isn't going to be very useful or you've misunderstood them.

Given the way lenders policies can be applied, you need to be extremely selective about which lenders are applied and when. You can't simply select one then move onto the next.

I don't believe it's a case of take the lowest servicing first and work upwards either. This works to a point, but eventually it will get in your way. Later down the track you'll likely have limited serviceability, but most of the equity will be in the first few properties you bought. If these properties are with the lowest serviceability lender, you're only going to be able to access your equity by refinancing. This can have it's own challenges as well.

There's no simple solution. Even with the best lending strategy the other half of the equation making the right property decisions in the right place at the right time.

 

[Rolf Latham]

bank said (THEY would lend only so much)

Its been said already...............

one lender can do so much

Our case studies show that from a poorly set up to a well structured portfolio can increase ones funding capacity by 1.8.

BTW, there arent many peops that I know of that have an income of 80 k that have portfolios of 5 million, from a standing start.

Standing start to 5 mill is aggressive regardless of income.


Ta

rolf

 

[Terry_w]

And don't believe everything you read in those magazines!

 

[KT_Blues]

Many thanks to all replied to the question.

I've sent requests to meet to couple of mortgage brokers in the area.
I also spoke to a guy I know who has a bit more experience in property and it seems that the structure of my mortgages is not right. He recons I should have done trust & I should have a mortgage broker.

 

[Greg Reid]

KT Blues,
$5m in 5 years on an $80k income on a buy and hold strategy is pushing the boundaries. You certainly need equity to be able to settle the next purchase of at least 5% plus stamp duty if not more and you need to be able to show servicing of the increased debt levels. If there was manufactured growth, the funds would need to be available for that also.

It would be unusual just for one lender to have all these properties, risk exposure may be too large, irrespective of income. They may get timing right in terms of buying well with better than average capital growth and they would most likely need to show good rent yields.

Lenders do take into account rental income, some at 75%, most at 80% and occasionally one at 100% (LVR < 80%), some lenders will take into account negative gearing, some will use actual repayments and others at assessed repayments on a P&I basis, so as has been suggested, which lender in which order is often critical to be able to grow a portfolio.

Some strategies may be where you have limited equity - use high LVR's to fund, OTP (Victoria) to minimise costs, purchase in states where costs are lower (stamp duty primarily), borrow < $300k per property to minimise LMI even at high LVR's.

Make sure you can fund whatever you do and have contingency plans, a safety net and risk insurance in place.

The use of trusts may or may not assist, depending on your own circumstances. They need not be used in every case someone buys an IP.

Good luck on your journey.

 

[Paul@PFI]

Hi All,

When looking at the property investors case studies in the magazine, you have people on 80K having portfolios of 5 million dollars in 5 years with the strategy 'buy & hold'. How do they do it? I understand equity, but equity is not liquid money.

You mean the QLD based multi-millionare spruikers ??? They often quote owning 28 properties (along with others??) and claim to have made $5m in three years. You probably shouldnt believe anything many of them say especially when they want to share the secret by charging you to join their club Or attend a seminar. Or take out advertorials in ainvestors mag and attend investmnet seminars....Or buy their ebook etc...And sell you a chance on a property too....
Ask yourself this. If you made $5m in a short space would you want to keep doing it or would you shut up and focus on what works ?? Ask yourself why then want to help you by selling you a rare and excellent chance to make $$. Why arent they going all in buying it for themself ? Most are just rats with a gold tooth seeking to profit from a new sucker. ..You seeing the scam yet ?? They make $25K+ for every dud property they sell a mug hoping to mirror what they claim made them millions. If they sell 20 suckers an apartmnet they make $500k....Its well oiled business and backed up by dodgy brokers, agents and valuers all in cahoots. And apparently unregulated in QLD / WA particularly.

Some of them have well documented histories with A Current Affair and other consumer groups. Their online profile is well sanitised. The hard sell seminars their little empire.

 

[KT_Blues]

Update on my serviceability, as many of you said, the lender and structure of the loans makes big difference in borrowing capacity.

Our current lender was comfortable with only 290K that is including 80K savings & 90K in equity. Another mortgage broker said he was comfortable with 400K not considering savings. Finally, this morning, another mortgage broker gave real practical advice and said that he can organise me almost 520+K loan & I get to keep 40K of savings with some changes to my current loan structure. Here you go.

To Greg Reid & Paul@PFI,

I was quoting the article from the magazine I read recently. I have showed it to the mortgage broker who found bunch of holes in it, starting that guy owned an earth moving company with all its equipment & that renovations were funded by construction company, who he was probably mates with. I do not really believe everything I read, but I am always amazed how anything can be presented in different light by overstating, understating and omitting certain facts.
My manager at work is fantastic at that