5 Little Known Strategies Successful Investors Use To Build A Solid Property Portfolio
This FREE REPORT reveals the lesser known loan strategies successful property investors are using right now to secure more funds, more investment opportunities, less interest rates and build a solid property portfolio. The report also uses real people’s stories to explain what you need to do to be on the right track to long-term investment success.
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Strategy #1: Limit credit card limits to secure more funds
If you are like most Australians, you probably have at least one credit card. Accordingly, to the Reserve Bank of Australia (RBA), there were over 16.5 million credit cards in circulation in Australia in June 2016. With Australia’s total credit limit now at a record high of almost $150.5 billion, this averages to a credit limit of $9,121 for each credit card!
Credit cards are great for tiding us over a cash emergency or for earning reward points, but…
Did you know your emergency line of credit could actually affect your ability to borrow and get in the way of getting your next investment property or that house with great development potential?
You may say, “I don’t have any issues with my credit cards, I always pay off my credit card on time!”
DID YOU KNOW
Every $1,000 you have on a CREDIT CARD LIMIT will lower your home loan borrowing capacity by approximately $3,600!
The key words are: CREDIT CARD LIMIT! not the amount you owe!
Even though you might only owe $2,000 on a $25,000 limit credit card, lenders will still take the limit of $25,000 into account when assessing your loan. This is because your limit reflects how much you could go out and spend tomorrow.
Whilst this doesn’t sound like much, if you have a $25,000 credit card limit then you’ve just lowered your borrowing capacity on your loan by over $95,000 – that’s a lot of borrowing power LOST!
What does this mean for you?
Well it means that you may not be able to afford that perfect rental property worth $750,000 with 3 bedrooms, 2 bathrooms and 2 garages. You may have to set your sights lower on properties worth around $650,000, which may mean either downsizing in the same suburb to 2 bedrooms, 1 bathroom and 1 garage, or looking further out from the city.
This can not only hit the amount of rent you receive in the short term, but also affect your capital growth in the long run!
A REAL MORTGAGE CORP CLIENT STORY
How eliminating credit cards allowed a client to buy their first investment property
A Mortgage Corp client, an IT manager with a $100K+ salary who owns a $750,000 home, asked us recently to help him and his wife look for an investment loan. They were looking at buying their first investment property and it was all looking good until we asked – how many credit cards do you have?
The answer? 3 credit cards for him and his wife with multiple cards ranging from $18,000, $21,000 and $22,000+ limits. We asked them WHY!? They simply shrugged their shoulders and said they didn’t use those cards anyway. The banks kept increasing their limits and they thought it would be good to have those extra credit cards around for emergencies…WELL THAT’S $220,000 LESS THEY COULD BORROW WITH $61,000 IN CREDIT CARD LIMITS!
Thankfully, the broker was our senior mortgage strategist Neil Carstairs who advised them to cancel the cards they didn’t need, keep only one credit account with joint access and to lower the limit.
The result? 2 cards sharing a $6,000 credit card limit
Neil put together a strategic loan package and submitted it to a different bank – not the bank they had the credit card with. He structured it in a way to not only get the loan they wanted but also in a way that makes it possible for them to potentially purchase multiple investments in the future, which is part of their investment goals.
Last month, our client finally bought their 1st investment!
We also advised them that their next step was to get settled into the new set up and to manage their lifestyle more effectively using the new credit card arrangement and mortgage offset account to help reduce the home loan interest more effectively.
Once they get settled in they’ll be off looking for their next investment in no time!
DID YOU KNOW
For some loan products, lenders automatically add a $6,000 credit card to your application even if you didn’t ask for it! This adds unnecessary credit limits that will affect your future borrowing capacity.
This shows how crucial it is to know how to properly structure your loan application and not just your loan.
For example, if you have a credit card and you owe money that you can’t pay off during the application process, it may be a good idea to do a ‘balance transfer’ so you can transfer the amount owing to the bank you’re applying to for the loan. You will save more money on fees when you bundle your existing credit card with your mortgage. Some lenders will also assess your loan application more favourably if you switch over your credit card balance.
Strategy #2: Realistically assess your borrowing power and serviceability
Property investors often think that their rental income increases their borrowing power dramatically.
In short “yes it does”, but often by not as much as they think.
Not all your rental income
can be used for serviceability!
DID YOU KNOW
Banks will only factor in 80% or less of your rental income when assessing your loan application?
This means that if you’re earning rent of $400 per week, your lender only sees $320 or less per week on your application. Even if YOUR OWN figures show that rent should cover interest and you were counting on your rental income to get your loan application over the line, sorry to say, but you might be disappointed to find out how much the bank will actually use!
This isn’t all bad news as it means that even in a worst case scenario you would still be able to maintain the mortgage repayments. The upside is that in a rate rise you will have peace of mind knowing that you have a buffer so you won’t fall behind on payments.
A REAL MORTGAGE CORP CLIENT STORY
How understanding how lenders factor in rental income helped a client secure a great investment opportunity and structure his loans more effectively
We recently had a new client approach us who is highly-educated, has a high-ranking position in a publicly listed company and who owns a $1 million home.
He seemed to know a lot about property investment and knew what he wanted. He came to us after he wasn’t able to find a bank who could lend him the amount he needed to purchase a house with fantastic development potential.
He was tired of his previous broker who only knew how to find the lowest interest rate without understanding his investment plans.
Long story short, neither the client and nor his previous broker understood that lenders were only using 80% of his rental income when working out his borrowing capacity. His loan structure was also not set up correctly to be tax effective and to provide adequate loan flexibility.
Now that he understood this, he realised he needed other ways to boost his borrowing capacity. It turned out that he was planning to use cash and savings as a deposit and was only proposing to borrow 80% against the investment (to avoid paying Lenders’ Mortgage Insurance). However, as he only had a small mortgage remaining on his own home, STRAIGHT AWAY Neil saw an opportunity to assist this client get 100% borrowing on the proposed investment (still without needing to pay Lenders’ Mortgage Insurance) and to get a more effective loan structure.
Neil also suggested the client speak to his accountant to possibly get more out of his loan from a tax perspective as well.
Result: We increased the client’s borrowing capacity dramatically and he was able to secure a great investment and his loans is now structured more tax effectively
This leads us to the next strategy related to negative gearing.
Strategy #3: The lesser-known benefit of negative gearing