If you’ve got one property under your belt, whether it be owner-occupied or an investment, taking that next step is a bit easier than you might imagine. Moving from one asset to a rapidly growing portfolio involves using the first as a catalyst for the second.
BY JEREMY CABRAL
Using your first property to kick off the second requires treating them as two separate buckets. For the first, after using it to secure a second, I’d concentrate on paying it off and no longer leverage the equity for further building my portfolio. That’s what the second bucket is for – getting the portfolio going using leverage and plenty of debt. Each person will have to decide what works for them.
For me, there’s a simple tactic to turn on the money taps for your investment property. Let’s say your property has risen in value due to capital growth increases (which could include capital increasing renovations), you could get the bank to revalue your property. Couple this with the equity you’ve gained from making principal repayments on your loan, and you might have enough to fund your first property investment.
If you’re clever at not overcapitalising your renovations, spending a little on your own property could significantly raise the value of your property, which can be used to further accelerate your property investment journey.
Post-GFC, it’s worth getting an independent valuation before going to your lender, as you wouldn’t want to alert your bank to a fall in the value of your property. This could have negative consequences that increase your loan costs.
How do you revalue your property?
You want a fair idea what your place is worth before going to the bank. Enlist the services of a properly qualified and local property valuer. Once you’ve done this, take the valuation to your lender. They still might want to send out their own valuer and may lump you with the bill. This will be worth the cost many times over if it unlocks the equity required to snavel an investment property.
How much does it cost for the bank to value your property?
The cost will vary from lender to lender, but to give you an idea, ANZ will charge about $150 all-inclusive while Resi will slug you $264. In most cases there’ll also be an administration fee to process the increase in equity for your property.
What don’t lenders like?
Banks might be uncomfortable with:
- Half-completed renovations
- Overly large or small square metreage.
- Unique properties such as retirement units.
- Heritage listed properties
- Owner builders, although a building licence and builder’s insurance should help.
What do lenders like?
Lenders will favour close proximity to large population centres with low unemployment, a borrower with steady employment, a sense of accuracy and honesty on loan applications and a blemish-free credit record.
What are some obscure ways to maximise borrowings?
There are a few ways of boosting your borrowing power, from guarantor loans to capitalising lenders’ mortgage insurance onto the loan.
Cross collateralisation versus individual securitisation
Cross collateralisation is when your home is used as security for an investment property. There’s a possible downside to this. If one of the properties reduces in value, the opportunity for further investment will be put on hold. If securitised separately, equity could be utilised from the other decently performing asset.
Equity opens doors and also pays for a fair few too. Once you have sufficient equity in your property acknowledged by your lender, you can buy an investment to clamber upon the next rung of the property investment ladder.
If you’re serious about creating a property nest egg, learn from the experts, do your own homework, learn the ropes yourself and invest sensibly.
Jeremy Cabral is the publisher of free home loan comparison website www.HomeLoanFinder.com.au.