Funding large portfolios?

How does funding of very large portfolios work? Eg the Steve McKnights and Nathan Birch’s?

I would have thought that lending criteria wouldn’t allow that many properties to be held - so are there particular investment techniques or structures that allow this?

From a personal perspective, my last purchase (4th) seemed a stretch with that bank. And although I have another deposit ready and all but my PPOR are cashflow positive, I’m at max capacity. So I feel I must be missing something...

appreciate the wisdom of the group

thanks

 

Get in a time machine and travel back to pre-2017

 

multiple entites and guarantors helps.

 

that makes sense, but there was an article about Nathan B picking up more properties even during COVID?

 

so just thinking about borrowing capacity: if I have all in personal name, will capacity be less / same / more than having each purchase in a new company (with me as sole director / guarantor)?

And would my credit file note each guarantee in addition to my direct borrowing?

apologies if basic questions

 

What sort of $$ numbers are you thinking of ?
Are you looking at over $100m ?
If you are looking at something smaller like $50m to $60m I can cover the bank covenant with you.
They are all company borrowings supported only by rentals (I retired from a salary base job 15yrs ago)

 

less if you are the borrower
if you are a guarantor you are likely to get a credit hit on your file

 

... I’m nowhere near those numbers, about $4m of property, just under 80% LVR... was just asking about big portfolios as I thought they must have figured it out

 

Thanks for the help Terry, Beano, Jaybean

 

With a 35% LVR and a three times interest cover you probably would not need to guarantee the loan

 

There were also articles about him being taken to court for a delinquent mortgage - and the name of the lender associated with those reports indicates he is scraping for loans at the very very very very very bottom of the barrel . They are a Latrobe funded brand , so he is using alt docs, meaning he likely cant (or wont ) show financials to pass servicing at a more mainstream lender or using a full doc product .

I dont believe his portfolio is anywhere near as robust as he says. I think he is propped up by BA fees and Prop Mgt and broking fees from binvested, zinger, blink etc...... The rare and unusual "advantages" he enjoyed with Westpac revaluations and cash outs appear to be long gone... and you also need to remember that he acquired a very significant number of properties under the more generous lending arrangements available pre APRA/ASIC and had lots of time for rents to mature.

Borrowing money these days is just a very different exercise to what it used to be , so purchasing and then holding a portfolio is just a very different exercise as well. This is especially true for people at the beginning rather than end of their accumulation phase; not only are HEMS / living expenses subject to a forensic level of scrutiny , but every dollar of debt is now deemed to cost you significantly more than it actually costs you... it’s called sensitised assessment , and it basically means that banks are required to assess your ability to repay a loan at an interest rate of at least 2.5% above the rate you actually pay. Where that lands in the real world is an assessment rate in the vicinity of 5 to 5.25% or thereabouts .

Additionally, the new rules also require that the assessment is based on remaining term ,principal and interest repayments. This point is KEY and often ignored by many old heads here who argue nothing has changed - they simply never encountered such limitations during their accumulation /expansion phase and have enjoyed such spectaular growth and rental appreciation that they remain almost immune to the changes even now. But they would have a whole different attitude if they were starting over from scratch. The reality is that the requirement to assess debt at remaining term, P&I has a double whammy effect of making interest only loans , which are obviously the most efficient and preferred choice for managing your cash flow , a real burden to borrowing capacity, and its a burden that grows as you grow. It creates a real conundrum, because on the one hand you want to utilise IO to maximise YOUR cash flow and minimise YOUR holding costs, yet on a LENDER calculator it weakens your borrowing power significantly.. and the more you do it the more the pain compounds.

This key point really needs to be understood if you want to get further than the average bear ... and it’s why property #4 was such a hard slog for the OP in spite of readily available equity. It's also why I continue to stress in my posts that cash flow and debt reduction are so important for the bigger picture/longer term. Paying down debt on a P&I basis is the only real way to control your borrowing capacity over time.... unless you are exempted by high income or other windfalls.

Just Imagine taking out a 30 year loan where at 2.5% where the first 5 or 10 years are IO. Under today’s rules , lenders not only add 2.5% to what you are paying - making it 5% ... but they also add P&I repayments over 25 or 20 remaining years ( as you have used 5 or 10 years of IO ) .. which adds an additional 50-75% to the 5% , resulting in a final assessment rate closer to 8-9.5% .... even if you are "actually" paying 2.5% . Then compare that to taking the same loan P&I from Day 1, where the difference between IO and P&I is far less . Same debt , but because of using P&I from Day 1 rather than using 5 or 10 years of IO first, you are effectively assessed at @ 6 or 6.5% instead of 8-9.5% . Then imagine that over 3 or 4 loans..... really adds up.

These changes are the precise opposite to what worked for the pre APRA generation , where sensitised assessment rates were not applied to any existing debt , where IO could be used with borrowing capacity impunity , and where living expenses were never queried . For that generation, every rate cut was the same as a pay rise. No wonder they could continually harvest equity, hold properties on IO for 10 or 15 or 20 or even 30 years if they wanted to, and keep harvesting equity and growing their portfolio. YET, in spite of all those advantages, very very few people got past 2 properties. How many of the new generation do you think will match or outperform that, using more restrictive rules?

Bottom line ; what you think you can afford at 1.99% or 2.59% or whatever rate YOU pay , is not what lenders deem you can afford . The people who bought before the rules changed never had to deal with any of those things. So if you attempt to replicate what they did, expect to reach servicing ceilings far sooner and not get too far.

If you want to buy, hold and then grow over time?, you must either increase your income significantly or manage your cash flow and holding costs and pay down debt and use P&I over IO wherever possible ... Unless you make squillions or inherit squillions or win squillions, in which case none of the above applies to you .... Otherwise, investors have to accept that you are going to have to put the cue in the rack ... which is where the OP is basically at right now from what they have said.

 

Have you gone with the one lender for all 4?
Suggest engaging a broker asap if you haven't already, ignore if you already have.
Only real way to increase borrowing capacity is to increase income or reduce debt

In the case of those large portfolio's it helps if you have a business that has increasing net profit each year, therefore increasing your borrowing capacity.

 

Very well said. Could of done with some paragraphs but you're a spot on.

 

did that on phone , late at night / early morning ... normally I would punctuate better but you get the drift .... for those who don’t earn or win or inherit big money and want to grow a large portfolio ( large dollar , anyway ) pay down debt or hit a servicing ceiling ....

#originaldebtreductiongladiator

#paydowndebt

#cashcowskilldebt

 

I think most of us are limited by our own knowledge here - the reality is these players aren't obtaining the same debt arrangements as everyone else. Its not very transparent either - so theres not a whole lot of info about how their funding. Most of these sharks are on commercial arrangements with private banks. There's providers in this space.

If someone has a 100m portfolio, with 30mill in debt and a 15% yield on debt --> they'd be very very attractive to commercial funders and would have very different underlying debt terms.

You just need to speak to the right people/channel for this type of profile. It goes outside the standard resi broker space, and often involves introductions to the private banker players.

E.g. Macq have a product under the business channel which provides 5 year IOs, 5 year terms, fully refi'd at the end of the term. Very very low rates. Done of the assets/character under very different debt arrangements. Other private channels in this space too. You don't need 100m portfolios, sub 10 is OK too for certain criteria.

The general comments about getting to this level are very true though (@euro73). This isn't really attainable using standard property plays. The 'income' profile behind these investors is very very high which makes them attractive to more commercial type funding arrangements.

 

When one of them started out he was buying properties for $50k - 20 years ago, and they were immediately onselling via an installment contract and getting $7k deposit. At the time they were earning double this per month from their business (2 of them) and the properties were paying them $200 pw rent each. Thats when they started selling courses and products too.

There used to be loans based on asset value too back then. If you had equity you could get a loan even without disclosing income.

 

Yes - I refinanced last year to one lender to improve my rates. Then did the most recent with them also since I’d already jumped through so many hoops. Nothing cross collateralised though. Might be a broker for the next one though.

 

Ok, I suggest engaging a broker ASAP as you may find you haven't maxed out your serviceability at all.
It's good idea to spread your loans across different lenders in order from toughest to most lenient re: borrowing capacity.
When building a portfolio of properties it's always a good idea to use a good broker vs going direct to bank, Banks are not bound by the 'Best Interest Duty' (act in client's best interest) like brokers are, Banks can only recommend the products they have on offer, even if other lenders have a more suitable product for what you're looking to do.
A good broker is key for investors looking to build a portfolio.

Rate should not be the only deciding factor considered when looking for funding.
You might want to look into 'All Monies clause' and how that relates to having all your properties and loans with one lender...

 

ASIC have pinged some spruikers for misleading embellishments at seminars about the numbers of properties they own. Things are very different these days v 10 years back. Lenders threw money at some people. From a land tax perspective alone the costs to hold a significant portfolio could be daunting. Rent to buy schemes doesnt mean they "own" anything for example and may be one way they have embellished fact.

ASIC explain it well

Rent-to-buy schemes
Some spruikers encourage seminar attendees to establish rent-to-buy contracts with people unable to get mainstream finance. Be aware it is illegal to facilitate a real estate transaction between third parties without an appropriate licence.

Under a rent-to-buy scheme, the seller makes a rental agreement with the buyer at an above market rent rate. The buyer may only exercise the 'option to buy' at the end of the rental period if they can get the finance to pay the balance of the agreed purchase price and have complied with the terms of the contract.

The buyer will typically pay an initial 'option-to-buy' fee as well as ongoing option fees which are separate to the rental payments. Even though the ongoing option fees are supposed to reduce the balance of the purchase price they are not likely to be secured in a trust account.

This is a high-risk scheme for buyers because their name only goes on the title of the property when they have purchased the property outright. Some rent-to-buy contracts may indicate the buyer will lose all payments made and have no claim over the property if even a single payment is not made on time.

In addition to rent payments and a fee for the option to purchase, the contracts generally require buyers to pay for costs such as repairs and maintenance, council rates and insurance.

If the seller has a mortgage over the property and fails to keep up their own repayments, their lender may have the right to repossess the property.

A rent-to-buy scheme can also be a high risk for sellers because they are effectively locked into an extended settlement period during which the property may increase in value. Sellers remain legally responsible for the property until the property title is transferred. They may be in breach of tenancy laws if they rely on contracts provided by scheme promoters and they may have to find another buyer for the property if the renters cannot or choose not to buy it after the rental period. If the seller is using the payments to cover their mortgage, they could be left vulnerable if the buyer fails to pay their rent or other fees.​

 

I think cosmetic or structural changes or re-developments enable some equity generation too, I think that's what NB did too. Didn't just but and hold IPs in the same state they were in?

What was interesting in our circumstances is that some of the loans we refinanced, always had IO as you suggested, but new lender provided 30 year term loans, so some loans will expire past 90 years of age. I thought main lenders would not allow this, such long terms but it seems there's no ceiling end? Perhaps if one has exit strategy illustrated how to pay them off then they are more lenient. I think lending is assessed on case by case basis.