Whether you're looking into property investment and don't know where to start, or looking to expand your existing portfolio, these expert tips could help you reach your financial goals sooner.
Any successful property investor will tell you that that a strategic investment is the best investment. It should contain a solid structure, yet must be flexible to any risks that are imposed. Your investment loan needs to match your financial situation as it affects your returns and cash flow.
Chrish Samuel, Senior Finance Consultant from Finstar Financial reveals what he thinks are the five characteristics that each loan portfolio should have.
As an investor it is important to have both the present and the future in mind when making decisions.
Like all things in life, having a good plan for your loan portfolio will help you to think about long term goals when making decisions, allowing for flexibility of investments while keeping a check on the risks and tax implications of your actions.
Creating a strategy is not easy, first you need to define your goals and know your limits. Then you need to figure out how much the banks will lend you as well as how much cash you have available to fund your investments. Consider these tips when formulating your plan of attack.
Chrish Samuel's five characteristics of an ideal loan portfolio
1. No cross collateralisation/ securitisation
Essentially this means making sure that no lender has more than one of your properties securitised for any one loan. If a loan is cross collateralised it binds the investor to a particular lender which could potentially limit the investor's ability to access any existing equity within their property. Furthermore, problems which may arise as a result of cross collateralisation include; when more than one property is securitised for a loan and you happen to default on the loan, the lender can freeze both properties to recoup their losses.
When refinancing, problems may arise especially if one of the securitised properties increases in value and the other decreases balancing each other out, essentially cancelling any equity which may have been available on one property had it been on its own. Preventing cross collateralisation is imperative for investors who have multiple properties featured in their portfolio. Whilst many investors shy away from having individual loans for each property, this actually works to simplify any future refinances saving significant amounts of money in the long run.
2. Risk management
The most ideal loan structure would separate a person's own home from their lending portfolio.
This is a simple way to protect a core asset should any investments go pear shaped.
To ensure that as an investor you fulfil all mandatory taxation requirements, it is suggested that you should separate non tax deductible and tax deductible expenses within your loan portfolio. One way to do this would be to separate your home loan into both a principal and interest loan whereas, your investment loan may only consist of interest-only repayments.
Note: Interest-only loans are commonly used to finance investment properties as they allow investors to maximise their cash flow across their portfolio. Interest-only loans do not limit the investor to making interest-only payments on the property unless the loan is fixed rate.
4. Utilising different lenders
Having multiple lenders looking after your investments has both positive and negative consequences. The positive consequences include, should your relationship with one lender on an investment cease it will not have a major impact on your portfolio, which could be the case if all investments were held under the same lender. However, by not having a significant portion of your investment with one lender it reduces your ability to bargain for rates with the lender and therefore, you may not be getting the best deal on your investment loan.
5. Maintaining an LVR lower than 80%
It is advisable that all investors strive to ensure that all their loans have a loan to property value ratio (LVR) lower than 80% this is to ensure that the investor saves on lenders mortgage insurance.
Since there is no one ideal property or strategy, every year you need to plan, change and adapt. According to Mr. Samuel, be aware of the financial returns from each of your properties and remember that the goal and returns will create your criteria for what is the perfect plan. 'By following the five simple principles listed above when it comes to structuring investment loan portfolio's it will ensure that you make sound decisions,' he says. 'These can protect your current and future investment interests whilst allowing you to get the most out of every transaction.'