If you want to take your investing to an A-grade level, these strategies are the proven and best practice, explains Richard Sheppard.
Many property investors are missing out on hundreds of thousands of dollars – and perhaps even more over the long term – as a result of elementary mistakes.
Below are common errors that, if avoided, can help you benefit from smart finance and ownership structures.
Choose investment advisors rather than banks for accurate property valuations
An experienced property investment advisor can often get you a 10 per cent better valuation on your property (or more). That’s huge because on a property worth, say,
$1 million, it translates to a difference of $100,000 and dramatically lowers the equity you can access for additional property purchases. Banks tend to be conservative with their valuations, but a smart advisor can work with selected and trusted valuers to legitimately get an appraisal that reflects a property’s true potential.
Don’t lock yourself in with one lender
Splitting your property loans across two or three of the best investment lenders increases your borrowing capacity by 40 per cent to 80 per cent. Smart use of this higher borrowing capacity allows you to invest in more high-grade property while also borrowing more as a buffer. More high-grade property with a bigger buffer means higher returns with less risk.
Don’t cross-collateralise your properties
Most banks like to cross-collateralise, that is, they use more than one property as security for a loan. A big downside for investors is it ties them to one lender and their valuer. Worse still, if one property goes up in value but another goes down, it can have a major impact on the amount of money you can borrow. This all has the effect of reducing the availability of equity and preventing you from buying other properties, so securing your properties separately is a must for smart investors.
Don’t ignore smart risk management strategies
Having extra funds for income protection and financial buffers is an essential risk-management strategy. These reserve funds are valuable during downtimes in the property cycle or if unexpected expenses arise. Use an investment buffer for loan repayments and rental income, and use a personal buffer for other life-related expenses.
This simplifies tax time and gives you the confidence to use all your borrowing capacity with inbuilt safeguards.
This article was originally written for the July 2015 edition of Peninsula Living magazine.