Ready to put some money into a rental property? Andrew Nicol, of Opes Partners, will guide you through the process in the second of our four-part series, the Beginner’s Guide to Property Investment.
Why invest in property? There are lots of reasons, but one of the most compelling is leverage.
Unlike shares or businesses, banks love to lend money on property. That means you can use the bank’s money to make your money (or equity) work harder and earn more. We call this ‘leverage’.
When you first think about property investment, you tend to think about the kind of house you want and where it might be.
But, as any experienced investor will tell you, that’s the wrong place to start.
You should spend more time thinking about how to fund your property and how to structure your ownership and borrowing so you can get the most from your investment, and keep buying in the future.
Don’t go it alone
Are you trying to deal with your bank because you think you can negotiate a better deal by going direct? Stick to your day job and save yourself a ton of time – you need a broker.
We work with lots of fantastic advisers who help our clients to structure their borrowing in a way that makes the most out of every dollar.
The right structures prevent you from getting stuck when it comes to buying a third and fourth property.
When you get it right, property investment can make your money work harder, ultimately creating a passive cashflow that gives you the freedom to live life on your terms.
It’s getting chilly out there
The climate for borrowers has become decidedly
chillier. Where you could once borrow up to nine times your income in some circumstances, you’re now restricted to four-and-a-half times, or possibly five times your income.
Calculations for paying the loan have changed. Banks are looking at your spending habits and are coming down heavily on unsecured debt.
Property investors find interest-only loans useful – that’s where you pay back none of the principal you’ve borrowed, just interest. Often this is more tax efficient (if you have your own mortgage), but also it improves cashflow, allowing you to invest in more property.
But in this climate, getting one of these loans from your bank is no longer a given. Even if you can get one, every time you want to roll over your interest-only debt, you’ll need to reapply as though you were getting a new loan.
One bank, or two?
Having all of your eggs in one basket when it comes to banking can be risky business.
Take Jane and George, who retired this year. They owned a rental property, but they sold their family home to downsize and free up some cash. Both mortgages were with the same bank.
The bank not only took the NZ$200,000 cash the couple made from the sale of their own home, but also took an additional NZ$150,000 out of Jane and George’s savings – and cancelled their credit cards.
We managed to relieve their situation slightly, but it took a lot of phone calls and it was horrendously stressful for Jane and George.
For that reason, we wouldn’t advise investors to get stuck with a single bank, where all your properties are ‘cross-collateralised’, which means they’re all securing each other.
There is a clause in a loan known as ‘cross-securitised collateralised debt obligations’ and it gives a bank priority over any property offered to secure a loan.
That property, if needed to cover another debt with the same lender, can be called upon to meet a shortfall.
Nor should you have your own home and a rental property with the same bank. Having different banks gives you ‘firewalls’, so if an investment is in trouble, the bank won’t sell your home from under you.
If you’re buying a new build, you only need a 10 or 20 per cent deposit. Great news. But the day after settlement, if you're borrowing from the same bank, they will want you to have 35 per cent equity in that property before you borrow any more.
That means your advantage has evaporated. Borrow from separate banks, however, and you can make your money work harder for you.
How to use several banks
To avoid LVR hitches, for your first property, you want to borrow your deposit from Bank A, and borrow against the property from Bank B. Then, when you have several properties, you’ll want to be split between Banks A and B, with extra support from Bank C.
I know this sounds complicated, and it is, but a good mortgage broker will understand this and help you to navigate the treacherous waters.
Is your mortgage adviser telling you it’s too complex and time-consuming to do all the paperwork for two or three different lenders? You need a new adviser.
This is also a good time to visit your lawyer and have them run through the documents you’re about to sign.
First published 8 January 2018
Andrew Nicol is an authorised financial adviser and the managing partner of Opes Partners. He has over 15 years’ experience in banking, finance, and property.
This article does not contain any financial advice and has not taken into account any particular person’s circumstances. Before relying on it, we recommend you speak with a financial adviser. This story reflects the views of the contributor only. Content comes from sources that we consider are accurate, but we do not guarantee that the content is accurate.
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