Raising the barriers to investor lending
Raising the barriers to investor lending
Seasoned investors know that an agile approach allows momentum in all environments, whether facing the challenges of higher interest rates, low housing stocks or an overheated market. With the right approach, tighter lending criteria becomes merely one hurdle to overcome on the way to building a high-performance portfolio, with a cool head required to last the distance. Shifting your strategy to prioritise affordability - and therefore serviceability - is key to navigating this environment, purchasing properties set for growth and providing solid returns. Where to find these property gems isn’t always cut and dried, but with the right expertise, a capital city investment shouldn’t be out of the question.
1. Get your finances in order - knuckle down and save
A tighter lending environment will hit your serviceability first, so it’s essential to have a strict budget to get your finances under control. It’s time to wean yourself off the credit card and delay any personal borrowing or car loans. Your expensive trip to Europe has to go on the back burner just now (only temporarily because when your investment returns start paying off, all those dreams and more will be there for the taking!). Look at ways you can still take a break and save money, perhaps try camping or have a “staycation” and do day trips from your home base. If you’re still renting, consider taking in flatmates to reduce living costs or live at home with parents to save money. Reduce automatic monthly spends by buying a phone outright and using pre-paid to cut phone costs. These simple savings will go far with improving your loan serviceability.
2. Determine your loan-to-value ratio (LVR) borrowing calculation
Successful property investment requires paying close attention to your loan-to-value- ratio (LVR). This is basically how lenders decide your eligibility for a loan, assessing the overall property purchase price and checking that against how much you want to borrow. Your lender will then divide your proposed loan amount by the overall property cost. Multiplied by 100, the final figure is your LVR. Based on a $300k loan for a $500k property, your LVR would be 60% - more than enough to satisfy your bank in this current climate. Some lenders will still allow for an LVR above 80%, but it can take time to find - it’s always worth getting professional assistance to work your way through the maze!
3. Find a property focused broker whose experience matches your goals
Now more than ever it’s essential to secure the right broker as they really can make or break your portfolio. Start by determining your desired portfolio size - this could be based on anything from one or two investments to 10 properties, or more. Alternatively, you could put a dollar figure as the target for your portfolio ie you want to build a portfolio worth $3m, so you’ll buy however many properties it takes to achieve that goal. This becomes your roadmap to helping your broker understand what you want to achieve and they’re able to structure your finances accordingly. By the same token, your portfolio goal is a way to help you weed out brokers who may not have sufficient experience in property to make sure you get there.
4. Deciding where to invest: think strategy first
Achieving capital growth comes from investing in areas with the right fundamentals - infrastructure, population growth, wage growth and low vacancies. When it comes to finding exactly these areas are, choose your state and draw a 100km radius around the CBD. Identify the blue chip areas and work your way out to them from the CBD. Look at lower priced neighbouring areas which often have better cashflows - it’s these that will help you hold your properties long-term. Once you have identified these “bread and butter” areas, assess whether it’s viable to buy there in terms of demographics (the people that actually live there), with a council that’s proactive about development. Don’t look in your back yard, Australia is a big place with multiple markets.
5. Demonstrate your risk management strategy to lenders
Whenever I add to my portfolio I take the risk out of the equation by knowing exactly where I stand - purchase price, stamp duty, conveyancing fees, holding costs - plus long-term projected gains. These are things your lender wants to know too - demonstrating that you’re fully across everything it takes to build a successful portfolio. This is where working with a professional helps because without the expertise to provide these figures, your calculations may not be as accurate as possible. You may under- or overestimate your property’s growth potential, so get advice from a buyers agent and ensure they provide written projections for your lender’s information. Other risk minimisation strategies include building insurance, income protection and a cash buffer of about six months’ rent for each property to cover unforeseen costs including maintenance, vacancies or job loss.
When you consider the elements we’ve discussed above, it’s all about lifting the bar on your investment strategy and giving it the same consideration you would for any major business decision. You need direction, experts, finance, the fundamentals of what your business is about and a risk management strategy to see you through the hard times. Demonstrate this to a lender and you’ll raise those barriers to investor lending, on track to building a supercharged investment portfolio and achieving the lifestyle of your dreams.
Discover how to create your own path to financial freedom with Your Property Your Wealth founder Daniel Walsh’s blueprint for success. Click here for details.