How To Get Finance When The Bank's Got You By The &^%%$
Many Australians’ dreams of building investment property portfolios may remain just that under stricter lending restrictions unless a significant shift in strategy occurs to meet these challenges. With banks taking a tougher approach to negative gearing, investors must evolve wealth building plans to be freed of this chokehold or risk being unable to maintain momentum. Discovering you’re unable to lend further to build your portfolio can come as a nasty surprise, so preparation is everything if you’re determined to keep moving forward and achieve your goals.
Bank finance key to future wealth creation
In a recent survey, 78.9% of people said they wanted to set themselves up financially for the future, 58.4% said they saw more benefits in investments apart from property, 48.1% said they wanted to invest as their retirement plan, 33.2% said they wanted capital growth in their properties and 24.9% said they wanted cash flow. When you look at these reasons, most people invest with future aspirations forming the bulk of their motivations. Without access to some kind of finance to help get their foot in the door, achieving these goals can become impossible.
Why banks have become negative about gearing
We’ve been told for many years that negatively geared properties are better to buy from a tax perspective, but that approach simply won’t work anymore if investors are trying to build a portfolio. The major problem lies in their serviceability. When lenders see that these properties are costing more to hold than they’re bringing in, it makes them wary about turning around and lending money to you again. As such, investors may get finance for the first property but then find themselves locked out and unable to finance more properties because the bank deems them unable to service another loan.
Taking a positive approach best in the current market
Investors wanting to build portfolios over the next 10 years can’t wait until the policy changes before purchasing more property. You need to seek properties that are seen as favourable to the bank in terms of their serviceability - and not just the first property you buy, but the next one and the next. If you get the formula right, you’re more likely to be able to continue or you risk being locked out altogether from the property market. A strategy that works in the current climate is essential, which is why I’m advising my client base to purchase positively geared properties as the way forward.
Secret sauce: purchasing properties today
The strategy we’re finding works best is sourcing properties with strong capital growth in the first 12 months of ownership coupled with strong rental yields to provide positive cash flow. Our clients are continuing to borrow more money to keep purchasing because the additional cash flow produced from their portfolios is helping with loan serviceability. Strong capital growth in the first year then provides equity for the next purchase. One of our clients recently bought her third property in 18 months - all in cities with strong capital growth estimates and overall cash flow of 6.2%.
By steering away from the more traditionally used strategy of negative gearing, we’re finding investors solutions to serviceability and being able to build their portfolios to create future wealth. Under a positively geared portfolio, investors then have the choice of being able to move forward with cash flow easing the way towards finance and swift capital growth getting them into their next property sooner. It’s a strategy that’s helping banks loosen their grip and providing great results all around.