Expert Advice with Helen Collier-Kogtevs, 31/05/2018
If I had a dollar for every time I heard an investor tell me how much the bank loves them – and all they need to do is pick up the phone and they get what they want – my surname would be Zuckerman!
Let’s not kid ourselves here – banks are a business. They are NOT your friend. They are in the business of making money, paying their shareholders a dividend and ideally deriving a profit from you with as little effort as possible. They may act like they have your best interests at heart, but at the end of the day, they view you simply as an opportunity to make money.
You can beat them at their own game…
I see many investors with one or even two properties who work hard to pay them off. Once they have paid their properties off, they do not leverage the equity to grow more wealth.
Instead, these same investors then buy more properties by ill-advisedly securing their own home against their investment properties. This then puts them in the position of possibly losing their own home if something goes horribly wrong with their investment property OR they get sued by a tenant.
For example, I know of an investor who had one investment property and wanted to purchase a second. The first investment property was fully paid off, which means he had considerable equity to use as a deposit on the second property.
His bank gave him the loan but wanted the title of the first investment property as security against the second investment property. The investor was happy to do it because the bank kept the interest rate low and it meant he didn’t have to do any further work, other than sign the mortgage documents.
The risk here was that the properties were cross-collateralised. This means that the loans are linked so if something happens with one property, it impacts the other.
Should something go wrong with the second investment property OR the investor is sued by the tenant, or visitors of the tenant, it could cost the investor both of his investment properties, because the first property is secured against the second.
Beat the banks at their own game.
The way I would advise investors in this situation is to purchase a second and subsequent property by taking out a line of credit on the first investment property or refinancing and putting the additional equity into a loan offset account. You can then physically take out the deposit amount (such as 20 per cent) from the available equity in property #1 and use it as the deposit on investment property #2.
I would then borrow the balance (80 per cent) for property #2 from a different lender to property #1. The purpose of this is to spread your risk.
By structuring your finance this way, should something go wrong with investment property #2, then property #1 is not at risk. I use many lenders, both traditional and non-traditional, to further spread my risk and as a means of minimising the potential for litigation.
An example of this is as follows:
1st investment property – fully paid off.
Arrange a line of credit with Bank 1 to the value of $200,000.
Take 20% of the funds from the line of credit and use it as a deposit on the 2nd investment property.
2nd investment property
Approach Bank 2
Give them 20% cash deposit
Arrange finance with Bank 2 for the balance of the purchase price, which is 80%.
By following the above example, you are not putting all your eggs in one basket and the bank can’t control your whole portfolio.
Now there are some investors who prescribe to the idea of mortgaging all their assets with one lender.
Just recently, I spoke to one investor who had 9 properties, all with Westpac bank. He had 2 properties completely paid off worth $1.9 million (one being his own home) but handed it over to the bank in return for an ‘easy’ process of applying for finance AND a slightly discounted interest rate.
Overall, he gave the bank $1.9 million dollars’ worth of equity over and above what was needed to secure the finance for his investment properties. As a result, if anything happened, his home was at risk.
For most investors, the idea of a lower interest rate is so compelling that they do it however seasoned investors know that ‘control’ is better than a ‘discount’. I’d rather have control by using a number of lenders (and pay slightly more for it), then have one bank control all my assets.
I’ve seen investors sell properties because the bank didn’t like or thought they were carrying too much debt.
What’s it to them if you are paying your mortgages on time, every time? Why should you be forced to limit your wealth creation strategy because some bozo at the bank is trying to prove himself, and as a result, impact your life! No-sir-ry… not worth the risk in my opinion.
I’d prefer this investor used at least 3 lenders in which he placed 2-3 loans per lender to spread his risk.
Here’s my tip
Don’t be afraid to think outside the box for finance solutions.
There is more than one way to fund your investment property purchase, so be sure you discuss all of your goals and plans with an experienced finance broker; they will be able to demonstrate options, such as the one I’ve outlined above, to help you grow your portfolio in a way that suits you.
The best way to open yourself up to creative finance options is to work with an experienced, qualified mortgage broker who is a property investor themselves, and thus has the ‘runs on the board’ to help you reach your property investing goals.
If you want to discover how having the right team of experts around you can support you in structuring your finances so you can continue to grow, then click here to learn about my P.E.A.K. Mentoring Programs and work with mentors and experts who will guide you every step of the way.
Helen Collier-Kogtevs is the Managing Director of Real Wealth Australia, a leading education and mentoring company for real estate investors. Not only is she a highly successful property investor and an educator, but also a best-selling author, and a philanthropist.
Helen is particularly passionate about helping people, especially people who are keen to create wealth and make a difference in their lives, and she has been mentoring thousands of new and experienced investors in their pursuit of wealth creation through property.
She founded Real Wealth Australia to mentor investors create wealth and financial freedom by focusing on helping them build an investment strategy to fit their individual goals, rather than focusing on one particular investing method using her successful “10 Properties in 10 Years™” system.
Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.