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Property investors want to create wealth and they want financial fitness. So do you need an overhaul to get there?
Blogger: Peter Gianoli, general manager, Investor Assist and ABN Realty
If you were going to attempt running a marathon for the first time, you wouldn’t just throw on a pair of sneakers and start running with the hope you are still alive at the end of the 42-kilometre race. Instead, you would prepare, train and ensure you were in the best possible physical condition before you approached the start line.
The same theory applies to buying an investment property. It is a serious commitment and not just a walk in the park. Often when purchasing an investment property, you will sign up to a 25- to 30-year mortgage. Before you do this, you want to make sure you are ‘financially fit’ and ready to face any challenges that might come your way in the years ahead.
If you are ‘financially fit’, you know you are prepared to run the long race. Your finances will have the stamina to withstand economic fluctuations or interest rate rises, you will have the strength to hold your nerve if times get tough and you will know your competitors to ensure you are getting the very best finance deal available.
Most importantly, if you are financially fit you will still have enough energy left to hold your head high when you cross the finish line, safe in the knowledge your investment property has earnt you money and stabilised your long-time financial security.
Understand the race environment
If you were to run a marathon you will be paying close attention to the race environment — the course, the weather, the obstacles and the competition. The same applies to finance and you need to understand the current ‘financial climate’.
Many experts believe there has never been a better time to borrow and this is true because the cost of borrowing money has never been cheaper. But on the flip side, you might also be hearing that lenders are being much stricter on finance applications and knocking people back who assumed they would have their finance approved.
This is not a negative scenario because lenders are showing greater accountability in making sure investors are capable of servicing a loan.
If someone says they can run fast they can’t automatically compete in the Olympic Games. There is a rigorous selection process and they must be able to prove their worth and ability. The same applies for finance. If you want to borrow money you need to prove your ‘financial fitness’ and show your lender that you have the ability to service your loan and are willing to make the financial sacrifices required to succeed. After all, great rewards rarely come without sacrifice.
Take it one step at a time.
When applying for investment finance, it can seem overwhelming as there are so many options to consider. The best approach is to take it one step at a time. A 42-kilometre marathon is a daunting prospect but if you break it down and just keep placing one foot in front of the other, you will be amazed at how much progress you can make.
One of the best things you can do to improve your investment borrowing power and overall financial fitness is to trim down any of your existing debt. Existing debt impacts your ability to service an investment loan and is not looked upon favourably by lenders.
Lenders will assume your credit cards are maxed out so if you have two credit cards, each with a $10,000 limit, the bank will consider you to be carrying an extra $20,000 worth of debt that doesn’t exist. Reduce your credit card limits, clear any debts and sacrifice any luxuries you don’t really need each month. Remember that in the eyes of the bank — the trimmer your debt load, the fitter you are.
To get financially fit you also need to tone up your loan-to-value ratio (LVR). The LVR is defined as the amount borrowed in relation to the property’s value and is usually expressed as a percentage.
Stricter lending conditions have seen the generally accepted LVR tighten at around 80% with fewer exceptions so the simplest way to tone up and strengthen your LVR is to save a larger deposit. Alternatively, your family members may agree to go guarantor on your loan but this comes with its own set of risks for all parties so it is a situation that should not be entered into lightly.
If you are using equity in an existing property as a deposit for your investment loan, make sure you are paying principal plus interest on the existing loan to build up as much equity as possible. A stronger financial position will only strengthen your application process and preparation is the key to success.
Hire yourself a trainer
One of the best ways to keep yourself motivated and ‘financially fit’ is to hire yourself a trainer. All the best athletes around the world have them because trainers or coaches have the ability to drive you, keep you motivated, share their expertise and wisdom, and provide you with encouragement when you need it the most. They are the experts and if you find the right person, you should excel under their skilled guidance.
A coach or trainer may come in a variety of different roles including a finance broker, financial advisor, accountant, mentor or property investment specialist. If applying for investment finance, be sure to find yourself an experienced finance broker as they have access to hundreds of products and funding arrangements that may suit your individual circumstances. Brokers are also best placed to steer you through the ever-changing market conditions as they have their finger on the pulse when it comes to lender policies and preferences so don’t underestimate the advantages they can provide. A financial trainer might be just what you need to keep you focused, disciplined and on track.
Don’t slack off
When working towards a long-term goal, fighting the urge to slack off is always one of the hardest challenges of all. If you are saving for a larger deposit or trying to strengthen your financial position before you apply for finance, don’t be disheartened or lose sight of the bigger picture. Set yourself goals and stick to them and avoid the temptation to blow money on unnecessary holidays, clothes, social outings and luxury items.
Help to keep yourself on track by always maintaining your book-keeping and budgets so both you and your trainer can closely monitor your progress from week to week and month to month. If you have a clear picture of your financials it will help you to stay motivated and will make the process easier when you are ready to step up to the start line and apply for investment finance.