Top 3 Finance Tips To Build Your Property Portfolio Post APRA
Building an investment property portfolio has never been more challenging than in the restricted lending environment post-APRA reform. Mortgage broker Richard Morgan offers practical tips to help wealth builders continue to achieve their goals.
Lending restrictions introduced by the Australian Prudential Regulation Authority (APRA) have hit investors, but their impacts can be lessened by focussing on key finance strategies. The measures announced in March 2017 have drastically impacted serviceability with lenders complying to higher assessment rates and discounting rental income by up to 50%. In many cases, this has prevented investors from further borrowing. By working in conjunction with the right team to give income streams focus, manage liabilities and leverage equity, investors will be able to achieve their goals within APRA’s new guidelines.
1. Income stream analysis
Income determines how much you can borrow and your ability to service a loan - a pay rise, overtime or taking on additional jobs can go a long way towards realising your portfolio ambitions. Even a $5k base pay rise can make a tangible difference in borrowing. Your investment income is crucial too, with some banks capping your rental return from an investment to 6%, regardless of actual numbers. If you’ve got a significant portfolio with high rental returns and income, you need to seek out the right bank as each will assess your situation differently.
Prior to APRA’s reforms, portfolios could be built by purchasing a property for capital growth and leveraging its future equity. While that’s still true, consider whether income generated by that asset will assist further borrowing - particularly important for new investors who must buy in growth areas with strong rental returns. Existing investors must not be shy in selling underperforming assets with low returns - the serviceability and borrowing they command could be better utilised for something with better growth and income. Assess existing rental returns and leases for anything significantly below market value and seek appraisals from alternate property managers. Consider a cosmetic renovation - new carpets, paint, kitchen and bathroom - as often a small investment can significantly improve yield. We also work with some clients who rent properties furnished (again a small outlay) which provides yields over and above market value, therefore aiding loan serviceability.
2. Manage liabilities
Reducing outstanding liabilities makes a huge difference to your serviceability e.g. taking a $20k credit card limit down by $5k-$10k. The same goes for personal and car loans - not only are you paying a premium in terms of interest rate but your serviceability is heavily penalised. There may also be opportunities to look at debt consolidation through refinancing. Your living costs are also important, with various lenders assessing them in different ways. Excessive spending will be revealed by the loan process and can severely impact your serviceability, so get across all your costs prior to application. Draw up a budget and look at your current living arrangements - perhaps you’re paying too much rent, or downsizing could assist you to further build your portfolio.
Run your existing investment portfolio like a lean business. Assess it for unnecessary costs outside of your tenancy agreement (e.g. landscaping), then check your managing real estate agent’s fee structure against that of the market. Also look at your current investment loans and interest rates. While this may not necessarily help you with serviceability (many banks are assessing repayments at around 7.25%+), lenders have moved rates for existing products. We find that many of our clients are in a position to save a significant amount through refinancing. That cashflow can in turn be directed into paying down liabilities or more income-producing investments.
3. Leveraging your equity
Seeking out banks with credit policies that support your long-term goal is one of the most important considerations when you’re building a property portfolio. There’s no point having the market’s cheapest loan product if it doesn’t have a decent cash out (equity release) policy to support your next investment purchase. This factor is essential because when equity - your capital - is combined with serviceability, opportunities open to build wealth through property in many innovative ways e.g. using equity from your existing portfolio to fund the deposit on your next investment.
Options to unlock equity include increasing income and reducing liabilities, with one of our favourite methods available through renovation. Not only does it have the ability to increase yield, it gives you the ability to add value and equity for further investment use. Earlier we touched on downsizing where you live. For many, the move from living in an owner occupier to renting is an option to unlock the equity and serviceability required for investments and projects. Retirement savings can also be an important (and subsequently profitable) part of your investment portfolio, with property purchased in a self-managed super fund (SMSF) structure.
Despite the challenging lending environment, it’s still possible to create significant wealth through property and create a large investment portfolio. Again, it’s important to make sure that you get the right team to help achieve this, with an experienced accountant and mortgage broker pivotal to your success.
* Please note this post does not constitute financial advice and does not take into consideration your specific situation. Please seek specific advice before acting.
