Listening to media hype about Australian property investment would give anyone anxiety. Building wealth through a property portfolio is a great long term strategy. But you must protect it to ensure sustainability over the long run.
Some property investors are fearful. Others are sticking to their goals and consulting with their team of professionals. Which one are you? In this article we will give you five practical tips on securing your property portfolio.
1. Don’t panic
Don’t read the newspapers. Or better yet, read the newspapers with a healthy dose of skepticism. If you are serious about building wealth through property investment, focus on your property investment goal. Find a property-centric mortgage broker, accountant, financial planner and buyers agent. Ask them their opinions and examples on the property investment articles you read in the media.
2. Property investment is a long -term game
Remind yourself that you are in it for the long term. There will be dips in your property investment journey. However, in the long run building wealth through property investment has proven to be a sound strategy.
We were recently talking to a client that has been investing since 1970s. He still feels that property investing is an excellent medium for building wealth in the long run.
3.Go and see your broker even if you have been told you can’t borrow any more
“Even through some of our clients have hit their serviceability ceiling we are able to review their portfolios. This ensures they can invest for the long term”, says Ross Le Quesne Director and Mortgage Broker at Aussie Parramatta and Rouse Hill.
“First thing we do is go through the property investment portfolio and ensure everything is updated. For each property, this includes the current value, the mortgage amount, the interest rate, what terms the loan is in, when the interest only period is expiring, what the plans are for the property and whether there is an opportunity to turn any of the properties into a dual income property”, says Ross.
We have clients who invested heavily in the 2014 period. They are either coming off the interest only period or very close to it. Their repayments will start to increase as they start to repay principle and interest. Simply reviewing your interest rates can help you save thousands of dollars.
For e.g., we recently had a client with 4.79% interest rate repaying interest only. We were able to fix at interest only to 4.09% interest over a three-year period. Based on the value of his loan, he was saving $16,000 in interest per year.
This $16,000 can then be added as extra income into the serviceability calculator for any potential new loans. This allows for continuous building of wealth through property investment.
Tweaking the interest rates can potentially release equity on one of the properties. A client may not qualify for a loan with the bank. Considering a specialist lender like Pepper means that they might be able to refinance their loan to create a cash buffer.
Do you have a cash buffer? Having enough money to put away in case things go wrong is a must. Three months worth of expenses just in case is a good place to start.
4. Plan the next steps for your property investment journey
Once you have all the answers from question 3 you are ready plan the next steps. You MUST find out your interest only expiry dates to be able to plan your property investment portfolio. Once you know the expiry dates, one of the options is that you can fix in your interest rate for the remaining term.
When investing in an Australian property portfolio, the difference between interest only and principle and interest can be very significant. Avoid the property investment interest only cliff by planning ahead.
5. Look at equity solutions
If you don’t have a buffer in place there might be an opportunity to refinance. Some of our property investment clients are using an option called Portability. This means you can substitute a security property or a new purchase of the similar value price that you originally planned for that company.
For example, you bough an investment property in 2012 in Campbelltown and you paid $300,000 for it. It was a 80% loan so you took a loan of $240,000. It is now worth $500,000 and you want to liquidate it. You want to get some cash out but you want to retain that $240,000 loan for another property for $300,000.
You can then substitute your Campbelltown property, take the profits to use as your buffer and the loan continues. Because you’ve got the same level of debt, the banks won’t do a serviceability calculation as long as the rent is similar to the rental income you are getting and your financial position is not going to be adversely affected.
There are some caveats on the Portability option. The loan is going to be over the remaining term. There is no change to your original contract so if the contract is on a principle and interest basis it will remain like that.
You are not starting a new 30 year loan term, so if you purchased the Campbelltown property in 2012 there is only going to be a 24 year remaining term. Check the clauses. Portability is more common that you think.
As a conclusion wealth through property investment is possible but you need to secure your property portfolio. Having a plan in place and sticking to it, creating cash buffers and speaking to your mortgage broker, accountant and financial planner will help you to continue to build wealth through property investing. We’ve recorded a podcast on this topic, so click here to tune in now.