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How to grow a large investment portfolio – building deposits

Discussion in 'Property Finance' started by Redom, 17th Jul, 2015.

  1. Redom

    Redom Mortgage Broker Business Member

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    So I’ve talked a lot about borrowing power and stretching the ‘serviceability wall’ as far out as possible across the forums and SS. That’s only one side of the equation when it comes to building a large portfolio.

    The other obvious financing component is how to come up with the deposits necessary to grow a portfolio? I’ll leave the successful equity building property investment strategies to others – they are well covered across the forums (e.g. below market value, renovations, developing, market growth, etc).

    However, I thought it would be a good idea to cover how finance structuring can play a large role in ‘maximising’ the amount of equity you have access to. This in turn gives you the deposits and firepower to continue to grow your portfolio.

    Finance structuring can’t actually create you equity in theory, but it can allow you to maximise the very most of your equity. It can also potentially find you additional equity that you never knew you had available.

    Note, when you consider both equity and borrowing power jointly, the potential interactions become a little murky. The below is just some general advice, its always best talking to your banker/broker for tailored advice.

    Some key considerations to keep in mind when thinking about ‘deposits’ in finance:

    1. ‘Flexibility’ in equity releases

    This is largely about banks policies to releasing equity and the type of documentation you’ll need to release that equity.

    Some banks are much easier to deal with when releasing equity. Other banks can be massive roadblocks (particularly at higher LVRs).

    Most banks will typically ask you ‘what do you plan on doing with the borrowed equity?’ Answering this question as vaguely as possible for property investors is preferable but not always possible.

    For example, if you say I want to borrow $100,000 of equity to buy investment properties, many banks will ask you whether you plan on taking on additional debt with that $100k (I mean, who buys houses for 100k anymore!). They’ll then check if you can borrow the additional money on top of that equity release with their borrowing power calculator. If you fail to demonstrate adequate borrowing capacity, they’re likely to reject giving you the funds altogether. Some banks will even want you to put in a pre-approval for the new funds before giving you the equity.

    Therefore, taking into consideration HOW each lender will allow you to release equity and what verification they need is an important consideration as part of lender selection.

    Furthermore, some lenders won’t allow equity releases above 80% (lots), others have a $100,000 maximum, etc. Some view them as greater risk and as a result make the process as painful as possible.

    For information, I personally find ANZ to be market leading in this space and haven’t changed their appetite post APRA (happy to be corrected, my last one was earlier this week). Other brokers here have indicated the same. The reason is they often don’t ask questions and allow ‘the funds are for future investment use’ as a legitimate reason for giving you access to your equity.

    2. Future borrowing capacity with that lender.

    This is where it gets a little bit murky. Regardless of banks policies, you’ll have to demonstrate that you can borrow the additional equity with all lenders.

    While this may be easy to do when you’re applying for the loan application, you’ll have to also keep one eye on what your future borrowing capacity may be like with that lender.

    For example, if you go to ANZ early in your portfolio because you know that they’ve got a great equity release policy, you’ll need to consider whether you’ll be able to access that equity with ANZ in 2 years time. If you plan on purchasing another 3 properties with FirstMac at the same time, it’s unlikely you’ll be able to go back to ANZ. The last thing you want is to have your equity stuck with a bank that won’t allow you to service, particularly if you’re early on in accumulation and have already paid LMI.

    Nonetheless, managing this often involves refinances at some point while at different points of accumulation. Some of the sophisticated investors with 10-15+ portfolios will likely need or have done refinances to release equity.

    3. Valuations, valuations, valuations.

    This perhaps is the greatest tool to finding equity that you didn’t think that was there. There are three predominant types of valuations: a computer estimate, a driveby valuation and a full valuation.
    • A computer estimate is allowed by some banks at an 80% LVR (and at 90% with ANZ sometimes!). These estimates, particularly in the Sydney market, often produce much better results than when a conservative valuer walks through the door. It typically helps when you have a property that isn’t as glamorous on the eye but has features that a computer can recognise is valuable (e.g. a computer cant see your renovations, but it does you’re land size, bedrooms, comparables).

      I have seen 20% variances between computer estimates and full valuations (in Sydney) multiple times over the past 6 months. 10% is more common. I recently had a client who had one $100k over the property’s true value on a ~250k property!

      Where possible, start by getting a computer estimated val. You can’t order a full val, get a bad result and then decide you want computer val from the same lender.
    • Kerbside: Some lenders allow ‘driveby’ valuations where a valuer goes outside and has a quick look around. They don’t go inside.
    • Full Valuations: Where a valuer walks through the door and makes an assessment. Typically great for renovation projects or where when you’ve added value. Most lenders, particularly the smaller ones, will default to a full valuation.
    Hope this helps.

    Cheers,
    Redom
     
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  2. DanW

    DanW Well-Known Member

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    Hi Redom,

    Another excellent post, thanks.

    I'll add another way to finance deposits - cashflow.
    Sounds a bit difficult at first, but once you've got very large non-cash tax deductions happening it's possible
    Using the PAYG withholding variation, depending on your situation you can sometimes reduce your monthly tax close to zero. At least cutting it back in a big way.

    This extra money, along with the tax return you receive from last years return, can add up to go towards a deposit on a small property.

    To make it work you have to put this extra cashflow into a second "savings" offset account instead of your normal one, so you don't see it or spend it.

    This is more pronounced on higher incomes of course, but if you're living below your means these kind of tax reductions can really accelerate your savings.

    In combination with the other strategies you mentioned, all this money together can make you deposit happen quicker.

    ps - on your point about refinances - don't let people forget that staying variable rate helps alot! I've been stuck before by going fixed rate, then not being able to draw equity because I was "locked in" and couldn't move to a more generous bank.
     
  3. leon brown

    leon brown Active Member

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    What a lucky guy with the generous desktop val
     
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  4. Redom

    Redom Mortgage Broker Business Member

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    DanW - some great additional points there.

    Definitely a useful strategy building cashflow too, it is particularly valuable as its more resilient to all market conditions.

    Yes - point about variable rates is a good one too. As flexible as a bank is, to release as much equity as possible at lowest cost, will also need to set yourself up to be flexible too. Lower LVRs and variable rates help here.

    Cheers,
    Redom
     
  5. Eric Wu

    Eric Wu Mortgage Broker Business Member

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    great post Redom, as usual
     
  6. Tranquilo

    Tranquilo Well-Known Member Premium Member

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    DanW can you explain this in a more simple to understand for me please:)
     
  7. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Save!
     
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  8. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    I agree. ANZ are very good in this regard and their valuation system and be played with a bit to help get the right outcome.


    I don't think it is such a big deal as it is easy to finance these days (if you can still service with a lender that is - thats the hard part).
     
  9. DanW

    DanW Well-Known Member

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    Like @Terry_w said the first part is save, i.e. spend less than you earn.
    I keep separate accounts, one for transactions, one for IPs, and one for savings
    1. Account for personal transactions, including home utilities and rent etc, paying credit card etc.
    2. Account for investment transactions, this has all IP income and expenses including interest. If it's going up or down I know if my IPs are costing me money or making me money.
    3. Account for "savings". This one I ask my employer to distribute any income above a certain amount. Most employers are happy to pay into two separate accounts.

    You can make all 3 offset accounts, so the balance cuts your mortgage interest.
    If you have mortgage with more than 1 bank, you can make account #3 to be with a different bank on a different mortgage. If you can't see the money, you're less likely to spend it :)

    Then the second part is getting your tax back each month instead of end of the year.
    For last year you should get a lump sum, but for this year you can do a withholding variation.
    You need to add up all of your estimated expenses (for the coming year) into these categories:
    * Interest
    * Rates/Insurance
    * Agent Comms
    * Repairs
    * Depreciation on plant
    * Capital works
    * Other
    Then you need a total for all properties.
    This is where Excel comes into it :)

    Provide that data to your accountant, and they will submit the withholding variation for you.
    I know an accountant who checks my work so I do it myself on the ATO website, and it's really not that hard to do. But there are some difficult questions asked so it's best to have someone help you.

    Next the ATO will send a nice letter to your Employers payroll asking them to stop charging you so much tax.
    Takes about 6 weeks or so. My payroll is a bit slow so I find it takes effect on the second pay after submission.

    The third part - now you pay less tax - direct all the extra cash into your savings account.
    The balance goes up alot faster, and after maybe 12 months you have enough cash for another deposit, or to pool with one of the other methods @Redom has mentioned above.

    The last part - ensure you have a safety buffer in case TSHTF. Either a small line of credit, or savings for when things go wrong like massive maintenance bills. These things can come out of nowhere sometimes.
     
    Last edited: 18th Jul, 2015
  10. Tranquilo

    Tranquilo Well-Known Member Premium Member

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    Terry can you explain this in a more simple to understand for me please:)
     
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  11. Tranquilo

    Tranquilo Well-Known Member Premium Member

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    DanW thank you for explaining in such detail. :)
    I have all incomes going to one offset:)
     
  12. S1mon

    S1mon Well-Known Member

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    if you do the withholding variation (and pay less tax per pay packet) do the banks look at that as extra income? (forgetting the ones that take into account negative gearing)..
     
  13. DanW

    DanW Well-Known Member

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    Haven't tried as I think they use gross salary, but maybe @Redom can answer if it's possible to convince a bank to use that as extra income?
     
  14. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    No, because it is not income.
     
  15. Syd Investor

    Syd Investor Member

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    In simple terms..... Instead of getting your tax refund at the end of the financial year your receiving it each pay therefore leaving you with a higher net income each pay then you would normally receive and improving your cash flow for your portfolio each week. Some people prefer this but most prefer the traditional refund at the end of the financial year.

    Banks will still only use the gross income you receive for servicing purposes and not your net income amount as Terry mentions.

    Cheers
     
  16. euro73

    euro73 Well-Known Member Business Member

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    See Terry's response...
     
  17. Redom

    Redom Mortgage Broker Business Member

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    Yep, its partly counted in many calculators anyway.

    So there's a function that asks for your total investment debt, so they can 'add back' the taxation impact of that debt (its deductible).

    Cant double count it.

    Cheers,
    Redom
     
  18. Doraemon

    Doraemon Active Member

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    Hi Redom,

    Thanks for the great post. As always. Just wondering how we as borrowers can go about correcting incorrect property attributes which have been quoted in the desktop valuation report ???- i.e. RP Data. For some reason, my PPOR was being listed in the RP Data Report as having 1 bathroom and 1 garage only, when in actual fact it has 2 bathrooms and a double garage. The two extra store rooms were not being noted there either. Should I in that case ask the bank to order for a full valuation? or submit a copy of my strata plan to the valuer as evidence of proof for the inaccuracy?
     
  19. Elives

    Elives Well-Known Member

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    you can change the attributes yourself on rp data. takes a week for changes to kick in.
     
  20. Doraemon

    Doraemon Active Member

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    Thanks for the tip. So do I just call RP Data myself as an owner to update on the property details? Any verification they would need?