The basics of obtaining finance

[dave901]

Hi guys,

This question may seem a little silly, but I am a beginner yet to purchase my first IP. I plan to do this next year, and use this year to educate myself and also save for a deposit. I have 2 questions at the moment to help me get prepared.

1. I'm unsure of the process (and order of events) for finding an IP and sourcing finance for it. Does one normally hone in on a desirable IP, and then shop around the banks for finance? Do I need to physically go into the banks and show them the IP I'm wanting to purchase and discuss the loan details they are willing to offer? What if the IP is sold to someone else in the meantime, have I just wasted a lot of time and effort? Or do I shop around the banks first with an approximate price range for an IP, find the most suitable deal, and then look for my IP?

2. In terms of educating myself, this is what I have done so far:
-I have gone to seminars from Custodian Wealth Builders and Dymphna Boholt.
-I read John Fitzgerald's book 7 Steps to Wealth (great, but I was scared by his reliance on negative gearing and tax breaks with the aim of achieving wealth in the long run - might have to do it tough for a while first it seems?).
-I am now studying material from Dymphna Boholt (I'm not enrolled in her course).
-I plan to read the books 'More Wealth..' by Jan Somers, '20 must ask Q's..' by Margaret Lomas and Peter Spann's '..$10 million in 10 years'

So, just wondering if anyone has any advice or recommendations for me based on my plan for educating myself this year as well?

I've been reading some posts in this site and the general consensus seems to be that you learn most things when you buy your 1st IP, and to take the plunge sooner rather than later before you get Analysis Paralysis.. I feel like I need good foundation knowledge before taking the plunge (and enough for a deposit too)! I also want to make a good IP selection for a strong start to my portfolio.

Apologies for the large word-count, just wanting to communicate my situation clearly in order to get the most helpful advice. Seems like a fantastic community here at Somersoft and I'm very glad I happened across it!

Thanks in advance ,

Dave

 

[Jamie M]

1. I'm unsure of the process (and order of events) for finding an IP and sourcing finance for it. Does one normally hone in on a desirable IP, and then shop around the banks for finance? Do I need to physically go into the banks and show them the IP I'm wanting to purchase and discuss the loan details they are willing to offer? What if the IP is sold to someone else in the meantime, have I just wasted a lot of time and effort? Or do I shop around the banks first with an approximate price range for an IP, find the most suitable deal, and then look for my IP?

Hi Dave

Talk to a banker/broker before you start looking.

They'll advise on structure, borrowing capacity and the process.

From there - you can head out and start looking for your IP.

Once you find something - you usually make the offer "subject to finance" or a cooling off period. During this time - your finance person arranges your loan approval.

p.s - don't shop around with banks, it can be detrimental to your credit file.

Cheers

Jamie

 

[Jess Peletier]

Hi Dave,

yep, as Jamie said get a broker on board - bankers are okay if you know which bank you want to go with but a broker can look at heaps of banks so it cuts out a lot of time and energy on your part, plus saves you from getting a heap of hits on your credit file.

There is a thread here about how to choose a good broker.

Have fun!

 

[Harro]

Remembering of course a Broker doesn't do this for free!

 

[Jake D]

Remembering of course a Broker doesn't do this for free!

What are you implying? Considering OP is a beginner, you may want to elaborate on your response.

 

[Redom]

Welcome Dave, great place to learn.

In terms of process for an IP purchase, its usually a good idea to get a sense of your budget first. You'll need to either go to a bank or a broker to work this out (either will do, any of the Big4 should be fine for your scenario).

They'll educate you and get your understanding up in first instance. It could be a good idea to sit down with a couple and learn through the process - most brokers have sizeable investing experience.

Having a plan is a great start - I personally find searching for individual properties much easier given my plan narrows down the property search to a narrow subset to look at. Any properties that fit the plan and help achieve my longer term goals do. This helps me overcome any 'analysis paralysis' as I believe in my plan.

As your investing profile matures, it'll be important to form your 'team': a broker, an accountant, conveyancers, network of investors, etc. You'll need a broker on your side here, as the only way your going to get to 10+ properties with an average income is likely to be by switching lenders at the right times.

Cheers,
Redom

 

[Redom]

Remembering of course a Broker doesn't do this for free!

No service is free - whether you go to a lender direct or a broker - it forms part of the cost basis for the lender and is inputted into interest rate you pay.

Lender/Broker is a cost of business for the suppliers of home loans (banks/lenders) - this cost forms part of the price of the interest rate.

Same as the checkout guy/girl at Wollies - where the cost is inputted into the price of your groceries.

You don't generally pay the lending manager/broker - just like you don't pay the checkout person.

With brokers though, note that their paid a commission and that these commissions do vary (albeit marginally) from lender to lender. Perhaps a little naive of me, but usually it doesn't play that large of a role in providing specific lender advice - but its worth noting as part of your education process.

Cheers,
Redom

 

[Harro]

What are you implying? Considering OP is a beginner, you may want to elaborate on your response.

Fees are payable in either a form of commission paid by the credit provider to the Broker (which could limit options for the borrower if a Broker is aligned with a particular lender) or a direct fee paid to the broker by prospective borrower or both.
Simply feel it would be best for the OP to self educate first.

 

[Peter_Tersteeg]

2. In terms of educating myself, this is what I have done so far:
-I have gone to seminars from Custodian Wealth Builders and Dymphna Boholt.
-I read John Fitzgerald's book 7 Steps to Wealth (great, but I was scared by his reliance on negative gearing and tax breaks with the aim of achieving wealth in the long run - might have to do it tough for a while first it seems?).
-I am now studying material from Dymphna Boholt (I'm not enrolled in her course).
-I plan to read the books 'More Wealth..' by Jan Somers, '20 must ask Q's..' by Margaret Lomas and Peter Spann's '..$10 million in 10 years'

I went through the same process (a very long time ago), you're off to a great start.

Of course, the best place to educate yourself is right here on this forum. All of the authors and books you've mentioned have a great deal very useful information, but there's more out there. With the exception of Jan Somers, each of these individuals have other services to sell (which I'd be reluctant to spend significant money on, even though I have in the past).

You're looking at negative gearing as a strategy. It's not, it's a set of circumstances based on the cash flow of a property. Don't aim to negative gear a property, instead look at the property, the numbers and ask yourself how are you going to make money from it. I can assure you that John Fitzgerald isn't negative gearing anything he owns. It's just a market reality that most property purchased today is going to be negative geared. You just have to do the best you can with these circumstances.


Realistically you first need to set a budget. What can you afford? Will it be a single purchase or several less expensive purchases? How much resources will you keep in reserve as a safety margin? Talk to a broker about this. Hopefully they'll also give you an overview of the actual purchasing process.

The hardest part about building an investment portfolio is "where to buy". Determining this is difficult because you're trying to predict what locations are going to have the best growth, perhaps considering rental yield, the right demographics, etc. All with your personal budget in mind.

Once you've figured out where, selecting the right property is just a matter of getting to know the location, looking at lots of properties until you find those you feel are worth making some offers on. Lots of research, lots of looking at properties, but this is generally the easy part.

Once an offer on a property has been accepted you need to finalise the finance, get insurance, organise building an pest inspections and get your conveyancing sorted. All of this becomes a process with lots of paperwork, but the appropriate service provider in each field should be able to give you instructions on what to do and what to expect.

 

[JameZ]

Welcome Dave!

As someone who started not long before you did, one of the things my mentor/broker drilled into me from an early stage is the importance of goal setting.

Why do you want to invest in properties? What are you trying to achieve? Where do you want to be in 2,5,10 years time?

Think of properties just as a vehicle to achieving the above goals.

Worth thinking about this as it will likely be the first question your broker asks you in the fact finder, and will help shape the type of properties you buy, as you will only be buying ones that gets you closer to your goals.

 

[dave901]

Thanks everyone, very helpful info!

 

[Jacque]

Hi Dave

Agree with the above. First stop needs to be with a good broker (feel free to email me if you want recommendations of brokers our clients have used over the years and we have found to provide excellent service) or lender to ascertain your serviceability and budget, based on your income and savings. Lots to learn so welcome to the forum!

 

[Big Will]

No service is free - whether you go to a lender direct or a broker - it forms part of the cost basis for the lender and is inputted into interest rate you pay.

Lender/Broker is a cost of business for the suppliers of home loans (banks/lenders) - this cost forms part of the price of the interest rate.

Same as the checkout guy/girl at Wollies - where the cost is inputted into the price of your groceries.

You don't generally pay the lending manager/broker - just like you don't pay the checkout person.

With brokers though, note that their paid a commission and that these commissions do vary (albeit marginally) from lender to lender. Perhaps a little naive of me, but usually it doesn't play that large of a role in providing specific lender advice - but its worth noting as part of your education process.

Cheers,
Redom

This is so true, yes of course brokers get paid but it paid by the lender as it is a cheaper overhead for them to outsource it to others and pay a commission for bringing the deal to them. Same as the bank would pay their broker a commission for obtaining the loan.

However if you find a broker who looks after your best interest they will in turn look after theirs

 

[Dianab]

Ive been stung with a really bad credit rating by appling with different banks

 

[Peter_Tersteeg]

However if you find a broker who looks after your best interest they will in turn look after theirs

The most profitable clients are those that have repeat business. If you're not putting your clients interests first, sooner or later they'll figure this out and you'll probably loose all their business. I think the brokers recommending lenders based on the best commissions are by far the minority. Most brokers genuinely want to do a good job.

 

[dave901]

You're looking at negative gearing as a strategy. It's not, it's a set of circumstances based on the cash flow of a property. Don't aim to negative gear a property, instead look at the property, the numbers and ask yourself how are you going to make money from it. I can assure you that John Fitzgerald isn't negative gearing anything he owns. It's just a market reality that most property purchased today is going to be negative geared. You just have to do the best you can with these circumstances.

Thanks Peter. Regarding the market reality of negative gearing, how does one best manage their cash flow when building their portfolio if, say, all of their properties are negatively geared to some extent? Ideally, one's equity position is continually improving each year, but cash flow could be worse off? Is it a matter of doing it tough for 10 years while you build your portfolio up? In that case, I imagine each IP purchase would put additional pressure on your cash flow? Even with the tax breaks, you're still paying out 60c to the dollar in debt, right?

I would be very concerned about having less disposable income and the potential to default on loan repayments.

Would love to know yours (and anyone else's) strategy for keeping a strong cash-flow while continuing to invest your equity, if negative gearing is a market reality. Obviously CF+ IP's would be ideal here, but sounds like they might be difficult to find and not something you can rely on?

 

[JameZ]

Thanks Peter. Regarding the market reality of negative gearing, how does one best manage their cash flow when building their portfolio if, say, all of their properties are negatively geared to some extent? Ideally, one's equity position is continually improving each year, but cash flow could be worse off? Is it a matter of doing it tough for 10 years while you build your portfolio up? In that case, I imagine each IP purchase would put additional pressure on your cash flow? Even with the tax breaks, you're still paying out 60c to the dollar in debt, right?

I would be very concerned about having less disposable income and the potential to default on loan repayments.

Would love to know yours (and anyone else's) strategy for keeping a strong cash-flow while continuing to invest your equity, if negative gearing is a market reality. Obviously CF+ IP's would be ideal here, but sounds like they might be difficult to find and not something you can rely on?

Negative gearing is only a reality in HOT markets such as Sydney and Melbourne, if you look beyond those 2 cities, you can find plenty of neutral - positively geared areas which also has good CG potential also, good luck!

 

[Corey Batt]

Negative gearing is only a reality in HOT markets such as Sydney and Melbourne, if you look beyond those 2 cities, you can find plenty of neutral - positively geared areas which also has good CG potential also, good luck!

Very true.

6-9% yields aren't impossible in metro capital cities.

I've financed a handful of residential properties with yields above 10% as of late, in metro areas and capital growth potential - certainly have to know what you're looking for but they do exist.

As per the OP's question, I've noticed a trend of clients who have substantially negatively geared properties purchasing neutral/positive properties later on to continue their growth, whilst mitigating holding cost concerns - a very prudent decision when facing the choice of severe negative cash flow, or stalling portfolio growth until rents grow on existing properties.

 

[Peter_Tersteeg]

I think the right strategy is about understanding your resources and how far they can go.

If you had unlimited amounts of cash, you'd never need to borrow money so you wouldn't bother paying for finance.

If you had large amounts of cash or equity, you probably wouldn't want to pay LMI.

If your cash flow is extremely high, you're not going to be too concerned about properties that are negatively geared, you'd focus on properties in high capital growth areas.

Most people do have limited cash flow, so they compromise and negative gear where they have to, but they also need to ensure that they're getting enough cash flow so they don't go broke trying to create wealth.