Smart use of maximised borrowing capacity and getting the right property valuations can significantly increase your profits while reducing costs and risk, explains Richard Sheppard.
Successful investors treat debt as a tool to build wealth rather than seeing it as a burden, so remember this when working out your property investment financing.
The first step is to get a good broker, and ideally one who specialises in property investment. They can give you specialised credit advice and guide you to the most suitable lender for a particular purchase or strategy.
After finding a broker, two things are crucial – determining your maximum borrowing capacity across all lenders and getting the best property valuation. Make sure your broker truly understands the difference in borrowing capacity across lenders because it can vary by hundreds of thousands of dollars. For example, factor in five per cent growth on $800,000 compared with $500,000, and you will receive $15,000 more a year in capital growth. It could also mean the difference between having only one property with no buffer or two more properties with a buffer.
One simple but very important risk-management strategy is borrowing more than you need. Suppose you have a $20,000 to $60,000 buffer – those funds can sit in your loan without accuring interest, but be available in the event of a rate rise or a change in circumstances, helping you to hold the properties for longer.
Property valuations are another crucial component for investors. Getting them right allows you to make the most of your equity, which is one of the keys to making money out of property. Suppose you get a 10 per cent difference between valuations on a $500,000 property, or five per cent on a $1 million property as often happens – that’s a $50,000 difference. That difference amount is usually enough for a deposit on another investment property, or a big buffer, or it could significantly reduce the cost of mortgage insurance. Over the next 10 years, this could help you make hundreds of thousands of dollars more.
This is where a good broker comes in again. Using strong bank networks, they can get two or three valuations on a property from different banks. Inexperienced brokers often don’t get a valuation at all, and it can be a huge missed opportunity.
When choosing the actual property investment loan, go for interest-only with an offset account rather than a principal and interest loan. The former scenario lets you free up cash for other investments and reduces costs if interest rates go up. Ultimately, you still want to pay down the debt, but you don’t want the bank to force your hand.
Like with any loan, you need to get a reasonable interest rate, but factor in the total cost of the borrowing, plus the investment benefits of borrowing capacity and valuation. An offset account is a desirable feature because every dollar in a linked transaction account cuts your interest charges while still keeping the money available.
Another tip for property investors – take the time to educate yourself about concepts such as borrowing capacity and valuations. Enrolling in a reputable course or workshop will empower you and increase your chances of profiting through property investment.
Richard Sheppard is the Managing Director of inSynergy Property and Finance Solutions. inSynergy provides professional property investment advice, property market research, specialised mortgage broking services and is an accredited investment property buyers’ agent. Visit www.insynergy.net.au or phone 1300 308 808.