What are your top tips for accessing equity to grow your portfolio without going too overboard?
It’s interesting. People don’t think as positively about equity as they should and it really is the gateway to property investment because it opens up opportunities.
The more equity that you have in your own property, then the more opportunity you have to invest into property and also into other asset classes if you want to.
There are two ways to get it. The first one is obviously natural capital gain and the second way is to increase your repayments on your loan. They’re the two ways that you can get equity.
And a lot of people just rely on natural capital gain and of course you can do that, that’s not an issue. But if you’re going to be doing that and you want to build a property portfolio, you’re going to get there a lot faster if you increase your repayments on your principal place of residence and pay that loan down.
It can be quite surprising just how easily and quickly you can get that equity through pre-payment. A lot of calculators will show you how to achieve it. Even just $10 a week will make a huge difference.
It’s also worth taking a step back and looking at your entire financial health. Because often people will be paying associated debt with their hard-earned cash and that could really be funnelled into the lowest interest, most flexible credit facility that you have, which is your mortgage.
Equity is the key to good property development
So if you’re somebody who’s starting out right at the beginning and you’ve got other associated debt, the best thing for you to do is to combine that debt on top of your mortgage if you can, if you’ve got the equity there, and then combine the repayments that you’re making on everything and pay that off the mortgage debt.
That’s going to create equity a lot more quickly for you and it’s a lot more efficient.
So you consolidate the debt but you also consolidate the payments. You don’t pay the minimum payment, you consolidate the repayments that you’re currently paying on top of the mortgage. The mortgage loan interest rate is so much lower than most other debt so you’ll be creating that equity a lot more quickly.
Once investors have built up that equity, how can they access it and use it to build a multi-property portfolio?
The first thing is to have a strategy.
Now it might only be for one property, it might not be for a number of properties yet. Some people, if they have a risk profile which is a little bit more conservative, they’ll want to stick to 80 per cent loan-to-valuation ratio on their own property, and I think that’s actually absolutely fine because that is actually going to give you a buffer if something goes wrong or something occurs that will affect your ability to repay that one or both of the debts.
So if you’ve got a conservative risk profile it’s important to stay at that 80 per cent on your own home.
The other thing is to understand the tax implications. So you really do need to get some advice from an accountant.
Having said that, you need to understand what debt is actually going to be tax deductible and what debt isn’t. So obviously on your principal place of residence, because that’s your property you’re living in, that debt isn’t going to be tax deductible, the interest on that isn’t going to be tax deductible.
It’s the purpose of whatever the debt’s for that will determine whether it is going to be tax deductible or not. So you really want to keep your investment debt separate from your owner-occupier debt.
Equity in your property is the goal to creating wealth, because it allows you to get that next property and the next one
Of course the one you want to pay down more quickly is the one that is non-tax-deductible and that’s the one on your home. So you want to accelerate the payments on that.
If you are building a multi-property portfolio and if you’re starting out buying maybe one or two or maybe three properties at once, some lenders will ask you to cross-collateralise that debt. That means they want to take all your properties, put them all together as security for one mortgage and have one big loan for your investment debt.
Now some people will do that and they’re happy to do that, but for my money, if you’re building a multiple-property portfolio you want to understand how your properties are performing and if you have all of your loans under one facility, it’s very difficult to identify which properties are performing and which ones are not performing.
For that, I do suggest a more lineal strategy or more individual strategy or structure which means that you’re going to have a loan per investment property. Now a lot of people think ‘well there’s a lot more administration in that’, but I think that over time it’s going to give you more information and more power than it is going to give you administration.
If you do have a non-performing property asset, it’s a lot easier to sell that off and unwind that, rather than if you have to detangle it from a cross-collateralised arrangement. Because if you’ve got say three properties or maybe four under a cross-collateralised arrangement, if you want to sell one off, you may be asked by the lender to provide a number of things. One would be new valuations, the second might be a new mortgage and the third new financials, new information.
So by having an individual or a lineal structure, you’re not going to have those issues if you want to sell off a non-performing asset. It’s also going to allow you to understand which assets are performing well for you and indeed which assets you can access the equity in to then maybe move on and buy another property.
How often should investors be trying to extract equity from a strong-performing property? Do lenders have any policies around frequency?
No, they don’t have policies around that, however the valuers are quite conservative in the main.
So if the lender can see that you’ve had a valuation done 12 months ago and you’re having another valuation done, sometimes you might have an expectation that the property will have increased in value quite significantly, if the area has performed well. You might be disappointed by that because some valuers might see the frequency of you accessing or getting another valuation and they will err on the conservative side.
Before you go and pay for a valuation do your homework. So ring some agents, maybe get them in to look at the recent sales in the area, maybe get them in to value your property, and have that information with you and in writing perhaps and on hand actually with you when you’re having the valuation done so that the lender can see that there is a valid reason for you to be seeking a new valuation to access the equity to buy the next property.
So it’s all about research. There’s no rule about how quickly you can get another valuation done on a property at all, but again, there will be some factors that will be ringing bells for the valuer and they will want to remain a bit conservative for the lender.
You can’t undervalue equity in property and it’s a funny thing. Some people really find that they don’t want to borrow on their existing place of residence that they live in, they don’t feel comfortable in using that as security for something else – whether it be for consolidation, or whether it be for another performing asset like a property.
So it’s really about moving through that mentally because the equity in your property is the goal to creating wealth, because it allows you to get that next property and the next one.
Equity is the key to good property development.