So you want to finance a property portfolio or already own an investment property and want to review how you have the finance sorted out so that the bank do not have all the control.
You should find the way we finance a property portfolio very useful.
Some people may choose to get advice from their existing bank; however more people today understand the benefits of talking to a professional mortgage broker who has the knowledge and understands how to arrange things.
The Choices When You Finance A Property Portfolio
When you build an investment property portfolio you will most probably need to borrow money to fund a percentage of your purchases. For this reason the largest expense for most property investors is the interest cost and therefore the choices you make when you finance a property portfolio are important.
A small difference to the funding cost can immediately make the difference between a positive cashflow investment and one where you will need to fund a shortfall. With the current low interest environment we encourage investors to look at the longer term picture to match with the long-term nature of property investment.
But there is more to getting the right finance than just the interest cost.
Recently there has been a lot of talk about the lending rules changing and this is now a major concern for many property investors and especially those new property investors who are reliant on high loan to value (high LVR) lending.
Of course for people considering getting into the property investment market there are some property investment basics to learn.
A Typical Situation For First Time Property Investors
When you decide to get your first investment property it is easy to get so excited with the idea that you focus on the property and give little thought to the finance. It may seem easy to get the finance approved with your bank and the advice that they gives you seems okay too.
Most first time property investors will take advantage of the equity within the existing home to fund the purchase of the investment property and the banks will link the two properties to provide the bank with the security required. This is known in bank circles as having cross security and it basically gives the bank access to both properties when the lending may only be required on one.
This situation is very common and can work for a lot of people who only desire own investment property and when everything is going smoothly, but it exposes you to more risk than needed and also can place limitations on you for any further investment purchases or should you wish to change your home at a future date.
Why People Invest In Property
Investing in property has proven a very successful and safe way for Kiwi’s to build a retirement income and if you do it right then it is hard to imagine this changing. The recent changes to the depreciation rules have changed things a bit, but the investment fundamentals have not changed.
There has been talk of other changes like the introduction of a capital gains tax, and for most serious property investors this does not change the reason to invest in property. If anything, it may make it less attractive for property speculators and therefore make the investment property market a more stable and desirable option.
Residential investment property remains one of the highest earning investments and therefore banks are willing to fund properties to a higher level than any other investment.
This allows you to invest in property with very little cash, and let the tenant pay off your investment.
That is why people love to invest in property.
Our Key Finance Considerations
As mentioned, the largest expense for most property investors is the interest cost and this is no different for those investors that have just one property or those who have large portfolios. For this reason it is important to ensure that you consider your finance options carefully and make sure that your property investment loans suit what you are trying to do.
Here are some key considerations that you should use with your decision making;
Control – be in control of your lending. You want to ensure that you are not going to lose control of your lending options should a bank make changes to their lending appetite or should new lending rules be imposed on the banks. A large number of home owners and in particular property investors were put in very undesirable and often costly situations during the recent Global Financial Crisis due to banks changing their criteria.
Capacity – if you want more than one investment property you want to ensure that you are not going to be restricted by a bank’s lending criteria. The reality is that most property investors would require more than one investment property to ensure they could retire on the income; however bank criteria makes it difficult to do.
Cost – of course it is important to have low interest rates too! Some people say that low interest rates are the most important criteria for choosing a lender, and while it is an important consideration it needs to be balanced with your aspirations to ensure you do not handicap yourself.
Time Is Both Your Friend And Enemy
You know that over time property values increase and more importantly to property investors, so does the rental income. You also know that to maximise your retirement income you need the mortgages paid off before you retire.
You therefore need to decide how many properties you need to provide you with the income that you desire and then purchase those properties as soon as you can to give yourself the maximum time to pay the mortgages off before you retire. But most property investors will be relying on the increasing property values to allow them to leverage the existing properties to help purchase the new ones.
Some banks say you need a larger deposit which makes purchasing more than one investment property too hard for many new investors.
Identify And Minimise Your Risks
When you invest in property there are some risks that you need to manage. The two obvious risks are the possible damage to the property by the tenants and the interest rates increasing, but there is also a risk that the rules might change and this could have a negative impact on your investment portfolio, and also for
You can get some very good insurance policies that will cover any repairs to the property and loss of rents should the tenant damage the property. Having a good knowledge and processes for selecting and managing tenants will help, or you can get a professional property manager to control this for you.
Most banks and other lenders will offer fixed interest rates which ensure that your finance costs are managed. As mortgage brokers we have experience in negotiating some very good fixed rates for our clients and having the right loan structure can help minimise the risk as well.
The other major risk that is often forgotten is something happening to the property owner – to you. With most properties being reliant on you earning an income, and your family relying on the rental income to help in retirement it is prudent to review your personal risks including any Life Cover and Income Protection Insurance.
As mortgage brokers we use a formal process to calculate what you require and can provide you a free report based on the information gathered with any mortgage application.
Your Mortgage Broker Is Your Best Friend
Having a mortgage broker that understands how property investment works is going to really help.
Unfortunately anyone from a bank can only ever offer you the best mortgage funding that their bank can offer and this means that you will be restricted by that banks rules. The bigger risk is that the bank will take all of your property as security and therefore have taken control away from you.
At North West Mortgages we have access to a number of lenders and are therefore able to structure your lending with the lenders that are going to work for you at any given time.
We ensure that you retain control and therefore always have choices when you finance a property portfolio.
