Expert Advice with Michael Yardney.
How you manage your money can have two consequences: it’ll either make you more money, or it won’t.
In a bygone era, the smart thing to do was to stash your savings in a bank account to earn a little interest and keep it safe.
Today there are many smarter options for investors to be able to use their money to make more money and buy more properties sooner.
So, let’s look at five ways to maximise your financial potential:
1. Avoid cross collateralising
Cross-collateralisation occurs when more than one property is used to secure either one or multiple loans and it’s an important loan structuring issue of which many property investors are not aware.
Fact is, if you use the same lender for all your properties, it’s likely your loans may have been cross collateralised and you probably don’t even realise it, but this structure may block your borrowing capacity or your ability to get finance in the future.
It’s a technique that lenders like to use to keep you tied up with them exclusively (which they call ‘sticky customers’ in the biz.)
Problem is, if you decide to sell a property, your lender may require you to pay down some debt on your other properties to maintain your Loan to Value Ratios.
They might also lump all of your properties together as one asset, which can have a negative impact on your available equity if one property is a poor performer.
It also means changing lenders can be difficult and costly.
All this might mean the difference between having funds to buy another property or needing to use the money just to keep your other properties afloat.
Untangling a cross collateralised portfolio is tricky work, and it’s not unusual for the lender to impose hefty exit fees.
Therefore, consider using different lenders to finance each property or make sure your loans with the one lender are not cross collateralised.
2. Ask: is your principal and interest loan slowing you down?
One school of thought is that paying off principal as well as interest on an investment property takes you one step closer to positive cashflow and living off your rental income.
But, when you’re still in the asset accumulation stage of your investment journey, it can slow down or freeze your purchasing power, which means fewer years for capital growth to do its thing.
In this case, paying down your debt isn’t as important as freeing up cash to be able to maintain momentum in your property-buying phase.
Instead, put your spare cash into an offset account – the net result is that you’ll the same amount of interest as if you paid down the debt, but you’ll be able to redraw your funds if you want it.
Sure it’s trickier to get interest only loans today, but there are still lenders out there willing to offer them to you if you look hard.
3. Offset is your best money-making bet
For investors and homeowners alike, an offset account can be a very effective tool in reducing loan interest and keeping funds separate for tax purposes.
Rather than earning interest on your savings, the balance is theoretically deducted from the loan balance, which in turn, reduces the interest charged to the loan and therefore the life of your loan.
It’s even a good idea (if you can be trusted) to use a credit card for your day-to-day living expenses earning you some bonus points and then pay it off in full with money from your offset account before the interest-free period is up each month.
Those extra thousands of dollars sitting in your offset can have a huge impact on your repayments in the long run. It’s as good as making money.
4. Use PAYG variation to put more money into your pocket sooner
Plenty of people see their tax return as ‘bonus’ money, which is fine if you plan to use it for a holiday or to buy a new sofa.
But by filing a Pay As You Go tax variation through your accountant, your estimated tax refund is divided across the year and paid into your salary.
The extra money dropping into your account each week can be used to offset your mortgage, pay off bad debt and reduce interest, or boost your deposit for your next property purchase.
5. Understand the importance of cash buffers
Having a “rainy day” cash flow buffer is a smart strategy which means you’ll be financially prepared just in case you need to cover unexpected expenses.
This will prevent you dipping into your savings or having to bump up your mortgages to cover unexpected costs.
Of course, done correctly your buffer money will still working for you by offsetting your mortgage, it looks good to lenders and it will keep you from going backwards if the unexpected arises.
Remember... property investment is a game of finance with some houses thrown in the middle meaning your financial setup can make or break your ability to add properties to your portfolio and grow your wealth.
So, getting these structures right at the outset is crucial.
If you’re not convinced that your finances are set up in an optimal way, it’s worth chatting with your property strategist or an investment savvy finance broker so you can make sure your money is working as hard as possible for you, not for the banks.
Michael Yardney is CEO of Metropole Property Strategists, which creates wealth for its clients through independent, unbiased property advice and advocacy. He is a best-selling author, one of Australia’s leading experts in wealth creation through property and writes the Property Update blog.
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Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.