Expert Advice provided by Multifocus
Join Philippe for his next Free Property Evening in Sydney on 5th May, with special guest Craig James from CommSec.
Philippe Brach is CEO of Multifocus Properties and Finance
Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.
Structuring finances is the second most important step on the journey to building a property portfolio. The first important step is to have a strategy before starting to invest. If you don’t plan to get wealthier, you won’t get wealthier!
The choice of structure to put in place will vary depending on the investor’s personal situation. However in every case it should involve selecting a “main bank”. This is usually one of the main lenders. It will ensure flexibility, conviviality and will have the necessary features to be able to manage a property portfolio easily. This involves joining the bank’s wealth package programme (they all have them!) that will cost an annual fee of about $400 a year), but it will ensure that the investor have no other fees such as monthly fees, switch fess, application fees, valuation fees, etc… They even offer a “free” credit card, which mainly means that there is no annual fee to pay.
This does not mean that all loans have to be with the main bank. It just means that the management of the various portfolio loans is run from the chosen bank, the other loans will just be “satellites” in the structure.
There are a number of key concepts to keep in mind when financing a property:
1 . Cross collaterisation.
In most cases it is best to avoid cross-collaterising properties. Cross-collaterising occurs when a loan is secured by 2 properties or more. Banks will recommend such a structure as it is simple to set up but as a result it will almost certainly reduce the investor’s options in the future. For instance, when selling one property, the bank will want to value ALL properties securing the loan and then will decide how much of the proceed of the sale they need to keep to ensure that the remaining loans are safely secured. If one of the remaining properties does not value well, the bank will almost certainly keep more of the proceed of the sale to compensate and keep the loan to value ratio at an acceptable level.
There is no need to cross-collaterise. It is easy to extract equity from one property to fund the deposit on a new property. By ensuring that every loan is secured by one property only, the investor will save some hassles down the line, and keep maximum flexibility in his/her decision making.
2 . Loans with different banks
There is a common myth that an investor should have only one loan with a particular lender and then go to another lender for the second loan, etc… The reality is that all loans require a personal guarantee from the borrower, which means that if you default with one bank, this bank can still force the sale of other properties if needed. It just takes a bit longer if you are with several banks.…Also defaults rates are pretty low. Depending on who publishes statistics it can vary but is around the 2% mark. So unless you are reckless, it is unlikely to become an issue for the well educated investor. I am not advocating having ALL loans with one bank, I am just saying that a few loans with one bank are not an issue. It will help getting additional interest rate discounts and do not present an absolute danger.
3 . Risk Management
Any wise investor will have a risk management plan in place, which mainly will include buffers, either through a line of credit of savings, just in case of unexpected expenses. It would be foolish to use all resources to get a deposit on a property and then be at the mercy of an unexpected event, being caused by the property of personal circumstances (accident, health issue, etc..). Similarly insurance is a great tool for risk management, especially income protection and life insurance.
4 .Cheap Loans.
Finding the cheapest loans using the internet is easy. Sorting what terms and facilities are attached is not so easy. There is no secret, if a loan offer appears materially cheaper than the average, there is usually a catch. They are usually offered by internet only lenders and both the borrower and the property purchase have to be straight forward for them to be able to process them. So they can be useful as a “satellite” loan but not as a main lender.
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