17 July 2015
First posted on Propertychat.com.au
So I’ve talked a lot about borrowing power and stretching the ‘serviceability wall’ as far out as possible across the forums and SS. That’s only one side of the equation when it comes to building a large portfolio.
The other obvious financing component is how to come up with the deposits necessary to grow a portfolio? I’ll leave the successful equity building property investment strategies to others – they are well covered across the forums (e.g. below market value, renovations, developing, market growth, etc).
However, I thought it would be a good idea to cover how finance structuring can play a large role in ‘maximising’ the amount of equity you have access to. This in turn gives you the deposits and firepower to continue to grow your portfolio.
Finance structuring can’t actually create you equity in theory, but it can allow you to maximise the very most of your equity. It can also potentially find you additional equity that you never knew you had available.
Note, when you consider both equity and borrowing power jointly, the potential interactions become a little murky. The below is just some general advice, its always best talking to your banker/broker for tailored advice.
Some key considerations to keep in mind when thinking about ‘deposits’ in finance:
1. ‘Flexibility’ in equity releases
This is largely about banks policies to releasing equity and the type of documentation you’ll need to release that equity.
Some banks are much easier to deal with when releasing equity. Other banks can be massive roadblocks (particularly at higher LVRs).
Most banks will typically ask you ‘what do you plan on doing with the borrowed equity?’ Answering this question as vaguely as possible for property investors is preferable but not always possible.
For example, if you say I want to borrow $100,000 of equity to buy investment properties, many banks will ask you whether you plan on taking on additional debt with that $100k (I mean, who buys houses for 100k anymore!). They’ll then check if you can borrow the additional money on top of that equity release with their borrowing power calculator. If you fail to demonstrate adequate borrowing capacity, they’re likely to reject giving you the funds altogether. Some banks will even want you to put in a pre-approval for the new funds before giving you the equity.
Therefore, taking into consideration HOW each lender will allow you to release equity and what verification they need is an important consideration as part of lender selection.
Furthermore, some lenders won’t allow equity releases above 80% (lots), others have a $100,000 maximum, etc. Some view them as greater risk and as a result make the process as painful as possible.
For information, I personally find ANZ to be market leading in this space and haven’t changed their appetite post APRA (happy to be corrected, my last one was earlier this week). Other brokers here have indicated the same. The reason is they often don’t ask questions and allow ‘the funds are for future investment use’ as a legitimate reason for giving you access to your equity.
2. Future borrowing capacity with that lender.
This is where it gets a little bit murky. Regardless of banks policies, you’ll have to demonstrate that you can borrow the additional equity with all lenders.
While this may be easy to do when you’re applying for the loan application, you’ll have to also keep one eye on what your future borrowing capacity may be like with that lender.
For example, if you go to ANZ early in your portfolio because you know that they’ve got a great equity release policy, you’ll need to consider whether you’ll be able to access that equity with ANZ in 2 years time. If you plan on purchasing another 3 properties with FirstMac at the same time, it’s unlikely you’ll be able to go back to ANZ. The last thing you want is to have your equity stuck with a bank that won’t allow you to service, particularly if you’re early on in accumulation and have already paid LMI.
Nonetheless, managing this often involves refinances at some point while at different points of accumulation. Some of the sophisticated investors with 10-15+ portfolios will likely need or have done refinances to release equity.
3. Valuations, valuations, valuations.
This perhaps is the greatest tool to finding equity that you didn’t think that was there. There are three predominant types of valuations: a computer estimate, a drive by valuation and a full valuation.
A computer estimate is allowed by some banks at an 80% LVR (and at 90% with ANZ sometimes!). These estimates, particularly in the Sydney market, often produce much better results than when a conservative valuer walks through the door. It typically helps when you have a property that isn’t as glamorous on the eye but has features that a computer can recognise is valuable (e.g. a computer cant see your renovations, but it does you’re land size, bedrooms, comparables).
I have seen 20% variances between computer estimates and full valuations (in Sydney) multiple times over the past 6 months. 10% is more common. I recently had a client who had one $100k over the property’s true value on a ~250k property!
Where possible, start by getting a computer estimated val. You can’t order a full val, get a bad result and then decide you want computer val from the same lender.
Kerbside: Some lenders allow ‘drive by’ valuations where a valuer goes outside and has a quick look around. They don’t go inside.
Full Valuations: Where a valuer walks through the door and makes an assessment. Typically great for renovation projects or where when you’ve added value. Most lenders, particularly the smaller ones, will default to a full valuation.