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When banks say no: The playbook for growth when borrowing is tight
When borrowing becomes tighter, investors have to reassess their strategies and think outside the box to find solutions to keep building their portfolio. Here’s how to do it.
Government reforms and higher interest rates have forced investors to review their strategies in a bid to maximise their borrowing power and continue growing their portfolios.
According to Strategic Brokers director Hung Chuy, investors should look beyond the major banks, recycle capital from mature assets and draw equity from their existing properties.
Chuy said the negative gearing changes meant investors were no longer able to rely on tax discounts to make a profit.
He said that some banks may also consider total tax deductions in their lending decisions, affecting borrowing capacity.
“In a nutshell, basically everyone’s been affected,” he said.
Here are the top ways to keep growing your portfolio:
Seek out smaller lenders
Instead of depending on the major banks for their borrowing, Chuy said investors should try smaller lenders as they tended to require less extensive serviceability requirements.
“Some major banks will put a huge buffer on any existing loans – so if somebody has four properties, four loans, all those loans are being scrutinised quite heavily,” he said.
On the other hand, he said smaller lenders may take a more tailored approach, assessing each investor’s existing debt with a smaller safety margin to enable better flexibility.
He also said non-bank lenders tended to offer lower interest rates in order to compete with larger lenders.
“People are just not looking outside of the majors, or they’re not talking to a good broker, or an investment-savvy broker – that’s where they’re probably finding themselves short,” he said.
Recycle capital from mature assets
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Additionally, Chuy said some investors may hold onto properties where the yield was not proportionate to their current market value.
To achieve the maximum cash flow possible, he said they should constantly re-assess the yield and sell properties that had already grown and run their course.
“Sometimes there’s potential to let it go then reinvest it into better markets,” he said.
Chuy said a house purchased in Logan for $350,000 in 2015 may have originally rented for $350 to $400 a week, but its value may now be close to $1 million, with rent of around $750.
“If they sold that property, collected their profits, paid their taxes, reloaded the money into different markets, those markets would then be presenting much higher cash flow and potential to grow because they haven’t run their course yet,” he said.
“You could potentially buy two properties at $500 presenting 5 per cent yield, which now give you $1,000 a week in rent.”
Chuy said that while investors could turn a much more substantial profit, many people didn’t consider the strategy.
“People who don’t think about this should revisit their portfolio to make some considerations around it, because they currently look at their yield based on the purchase price,” he said.
“You can have a big surplus on cash flow in a new growth market. People just don’t think about this sometimes.”
Release equity
Additionally, Chuy said many investors had the option of drawing equity from their existing properties to partially fund their new purchases.
“What we typically do is take a separate loan from one of the properties that you have existing, and that will usually be 20 per cent plus stamp duty,” he said.
“We normally take about 25 per cent of the new property purchase price out from one existing property, and then we fund 80 per cent on the next property.”
Chuy said that by using equity, investors can have 100 per cent of the property’s purchase funded, plus 5 per cent of the extra costs, enabling them extra flexibility.
“The best way to do it is, if you have cash savings, keep the cash for your principal place of residence (PPOR) and offset, leaving that as a buffer,” he said.
However, Chuy warned against cross-collateralisation, where loans are linked together for simplicity.
“If one property goes down and you need to sell another property, you can’t sell it unless you sell both. So that’s a big problem, or has been in the past.”
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