The ability to leverage property to finance additional investments is a key enabler of successful property investment. However, it is important to use the correct type of finance to ensure you achieve the right balance of leveraging for maximum potential return, and have an adequate risk buffer in place.
Blogger: Peter Gianoli, general manager, Investor Assist
Being able to manage your loan repayments throughout the financial year is absolutely critical. There are a number of strategies you can use to improve your short-term cash flow. These include:
Retain a buffer: Plan ahead for managing the cash-flow gap and understand the implications of rate rises on your cash flow and retain a buffer by borrowing less than the maximum you are able to access through your lender.
Review rental yield: If you have secured a good tenant for your property, you may be reluctant to ask for a higher rate of rent. However, it is essential to review your yield every year, to ensure you are meeting your own needs and that you are charging fair market value.
Vary your PAYG instalments: If ongoing cash flow becomes an issue, consider a PAYG variation. This allows you to project your losses for the financial year and have your income varied downwards appropriately, thereby claiming more income throughout the year and effectively claiming your tax refund ahead of time.
Renovate for cash flow: Renovations are typically used to increase capital growth, however smart renovations on the right types of properties can be conducted quickly and result in a significant boost to rental yield. These can also be financed using equity in a property.
Be mindful when assessing properties: If cash flow is a potential risk, be mindful of the type of property you are purchasing. A vacancy could be financially disastrous if you have only one property in an expensive suburb with a correspondingly large mortgage. However, a portfolio of several cheaper properties will help alleviate the cost of a vacancy.
It is also worth remembering that while the family home should be paid off as a principle-and-interest loan, investors should typically choose an interest-only loan for their investment properties.
Types of loans also need to be considered. A cross-collateralised loan is one where another property is included as security for a mortgage under a single loan. This may happen where an investor finances multiple properties through the same bank. It is a strategy used by banks to improve their security on loans, and can be used by investors to boost their borrowing power or avoid paying mortgage insurance where they have less than a 20 per cent deposit.
However, cross-collateralised loans can be restrictive to an investor. Where a cross-collateralised property is sold, a bank may reserve the right to direct proceeds towards payment of other loans in that portfolio.
In addition, in a cross-collateralised portfolio, if one property has equity that you wish to utilise to invest further, but another property has negative equity, the overall portfolio position may render the equity inaccessible from the bank’s perspective.