Building a portfolio without LMI

As the title suggests I am curious to know if anyone has built a successful portfolio always putting down a 20% deposit for purchases?

I understand in the past that (almost) everyone borrowed high percentages to enable them to purchase more properties asap but with the new borrowing regulations I am curious to know if it's changed things a little. Everyone's biggest issue at the moment seems to be serviceability and not deposits.

My current position is I own 2 IPs (cash flow positive) with enough equity to purchase another around the $400k mark and keep everything under 80%.

I am a mid 20s rentvestor with the ability to save quit a bit of cash so not using LMI would only slow the next purchase by 12 months (less if I get CG/increase values in other IPs)

Sleep at night factor is a major thing for me and I feel that only borrowing 80% keeps me comfortable and leaves me in a position where I'll never be in a position where I'm a slave to the debt and forced to become a workaholic to support the portfolio in the early days.

Has anybody else taken this approach or am I shooting myself in the foot by not stretching a little further?

Thanks!

 

Use LMI to your advantage, put extra money in the offset. Simples. At 88% the LMI is quite reasonable, so you'll have an 8% "buffer" in the offset. It's also getting harder to cash out, which means stuck money/equity.

 

Hi Brendon,

If you don't currently have a PPOR, my feeling is that you're shooting yourself in the foot by using 20% deposits.

A better option can be to use LMI for your investment purchases, but still keep as much cash as possible offsetting the loans. This has the same effect as using a 20% deposit BUT, when the time comes to buy a home, you can pay as much cash as possible for the PPOR and retain the high loans on your IP's rather than having 80% LVR across the portfolio and a PPOR with also high LVR.

From a tax perspective it makes a lot more sense.

 

I have used varying degrees of LMI but never exceeding 90% on a purchase (personal rule). These days, 87% is about the optimum before the cost of LMI skyrockets for the extra percentage. Quite a few of mine have been at 80% but for very specific reasons. I usually purchase between 87-90%.

There is no hard and fast rule and I'm sure it can be done but it comes down to your personal risk profile and goals. It will definitely slow down your accumulation rates, but not necessarily your growth rate. If you pick two 80% properties they could easily outperform three to four 90% properties over the medium term if the 90% properties are the wrong properties (think two western suburbs houses in Sydney vs. four in Moranbah/Blackwater/Weipa/etc. five/six years ago). All things being equal however, leveraging higher will accelerate your accumulation rate and usually your absolute net worth over time. Of course, it comes with higher risk.

There's no point in pushing yourself if you're just not comfortable with it but taking some mentoring can assist with expanding and understanding your risk profile and helping to push a little harder to accumulate wealth faster.

 

I have only ever bought at IPs at 80:20 lvr. I don't really like paying LMI though I understand why other people do.

I currently have 2 IPs rented, 2 under construction (1 will be sold). 1 about to title and settle and start construction. 2 a about 4/5 months of titling.

I try and settle some of the 20% with uplift. Or settle 100% using a private loan and then revalue to 80:20 inc construction loan.

Best to do what your comfortable with. Ultimately I suspect serviceability and not deposits will become everyone's limiting factor.

But others raise some valid points regarding tax and ppor.

 

We bought first IP at age 28...similar age to you now, from then till age 38 we were aggressive in that anytime we could reval we did and dragged maximum equity out to reinvest.
LMI allowed us to purchase more property AND leave more cash in the offset account...this was paramount for my own comfort level.
I have always been more comfortable paying LMI than if we were to have more of our cash tied up in a very illiquid asset like property.
Rainy days come, so you need some available cash when they do.

 

If you have equity in a property already you can borrow against that to buy another property. I did that for IP 2 and 3. No LMI, no cash deposit.

 

Thank you all for the great responses!
It seems that LMI is the 'normal' way to go.
@Jess Peletier you are 100% right that I am better having cash in offsets so I can eventually buy my PPOR without too many tax complications.

And the mentoring thing is definitely something I need to get happening this year, you can learn a lot from reading etc but it's all generic advise so getting some personal advise is definitely beneficial!

High risk doesn't stress me, it's more that I don't like feeling that I am 'stuck' working to make large repayments but having cash in off sets obviously gives me breathing space.

I think I need to find a quality accountant and broker to help me sort out my mess before I purchase again!

Thanks!

 

I always use 20% deposits.

 

it all depends. The majority of my clients don't use LMI as they are more established and have lots of equity.

New comers may not have the benefits of equity though.

My general rules is if you can avoid it avoid it, save money. You can always increase a loan to 90% later if need be. But the more you own the harder it will be to qualify for LMI.

Also keep in mind what Jess said. You don't want to be using cash - if you can avoid it - if you have no main residence.

 

I am a big believer in the concept that just because you can does not mean you should.

It is exciting to be geared to the hilt when you are I a rising market - but more often a lot of "genius" investors are just lucky in terms of market timing. Living in Perth I have seen this a lot.

Maybe the fact that banks want insurance to protect their lending position with you is a message that you are taking on too much debt.

And when I started business I had to fly to Sydney to ask a private lender for capital as nobody would support me. It worked but it could have just as easily not worked - and that was a business interest that has more growth potential.

Anyway - you need a clear end game and then focus on accepting the lowest amount of risk to achieve this return If you end up with 10% more asset than you hoped for yippee: but it is hard to come back from a zero base.

 

I've always used 20% deposits... One of the main reasons is because it tends to put alot of the property types I target into the positively geared territory.

The other thing that I don't think has been mentioned is servicability..
Say you have purchased 3 X 400k properties. Using 20% deposits as opposed to 10% means you have borrowed 120k less on the properties. Thus greatly improving servicability for your next purchase.

 

Always wondered about private lenders. What kinda of products/ventures do they normally lend for and how does one go about finding one?

 

20% cash deposits or from equity? Good point about the serviability. At 5% that's, what, an extra $6k/yr to help with the next IP.

Personally I'd prefer to pay LMI on those 3x $400k IP's and have the other 8% for each IP in the offset just in case. A tax deductible ~$15k paid off over 5 years is a pretty cheap cost to have a $100k buffer.

It really depends on your cashflow, ability to save, how fast the market you want to buy in is moving, what stage of investing you're at etc.

 

The person I used was not in the business of lending. Just a lovely family that took a liking to me.

And they charged 15% interest so the loan was refinanced in 12 months.

 

Depending on your strategy and how aggressive you want to be think of the opportunity cost as well. It might take you 12 months to save the 20% but if you had have gotten into the market sooner by utilising LMI you may be able to take advantage of the CG which you may be missing out on by sitting out of the market saving for longer. More often than not, bought well, the CG outweighs the LMI costs.

 

This is also a good discussion around why there is no such thing as a negatively or positively geared property. It all depends on your LVR and individual cash flow situation - the same property could be negatively geared for one person and positively geared for another.

One of the bigger misconceptions I hear is around strategy, namely someone saying "I have a negatively geared/positively geared strategy" which is just plain wrong.

Talk to your accountant, mortgage broker and mentor/property adviser and choose an LVR that works for you based on your risk profile and goals. There is no one-size-fits-all in this game.

 

Success is relative but I have never used less than 20% deposit even with access to 90% lending without LMI (wife's employee discount). My banker has repeatedly told me the benefits (like access to more funds for future purchase, tax optimisation etc.).

The reason why I wouldn't use LMI or less than 20% deposit.

1) I have had good equity growth on my portfolio and I can use equity from previous purchases to fund the deposit (and achieve good tax outcomes).
2) My portfolio standing with the bank remains very strong and it helps a lot with future lending (e.g. they would accept my generous valuations without sending a valuer, quick approval times etc..)
3) Having at-least 20% equity in a property is also a personal insurance against market fluctuations.
4) It also improves property cash flow and I am able to buy for capital growth rather than yield. This cycle continues providing me with more equity and good cashflows at the same time.

It has worked for so far but I have a high income and Sydney growth has made a good contribution too.

 

Certainly does, many factors will influence which way you go.. If limited on deposit then LMI is a way into the market.. Or to have larger buffers in place as you mentioned..

I've mainly used cash deposits.. Being a buy, hold, sell investor, I've always had them as cash when i purchased.
The only exception to this had been H&L deals.. I've been able to settle some on 80% lend and 10% deposit....the other 10% coming from the growth in value from purchase to titles.