How to grow a multi-million dollar portfolio on an average income in the new lending environment

I've never understood the Banks' mindset on that one.

I mean; folks always need to live somewhere, so if one tenant leaves you can get another soon enough most times, which means the supply of rental income is pretty much indefinite, and if you have enough properties the risk is spread thinner from a vacancy aspect.

Yet, a bloke can lose his job at aged 45 and not get another one for a long time...a lot less secure from an ongoing income aspect in these times.

 

Please elaborate.

Lenders not regulated by APRA are regulated by ASIC. ASIC is one of the regulators working in tandem with RBA and APRA to address the risks in the property market. (That's according to Mr Austin, Firstmac CEO)

 

ASIC don't look at these lenders serviceability calculators. Their regulatory scope is quite different to APRA who take a look at ADI's balance sheet health aiming to keep our financial system stable.

Some call it the 'shadow banking' sector in other economies. Effect of making broad changes to the primary market is that more lending gets moved through to other institutions that don't have quite the same regulatory oversight.

 

Do you have specific first-hand conformation of that? Because Firstmac received ASIC questionnaires similar to the ones sent by APRA on the matter of prudential lending.

 

Do i have first hand confirmation that APRA and ASIC have different purposes and regulatory oversight?

Their respective home pages will have some more info for you about the purposes of each institution.

ASIC: http://www.asic.gov.au/about-asic/what-we-do/our-role/
APRA: http://www.apra.gov.au/Pages/default.aspx

RBA would be involved too, but the prudential oversight was purposely split off from them a while ago as part of improving the governance framework overall. I'm pretty sure they have an informal monthly/quarterly catchup where they sit down and form an overall strategy in conjunction.

Cheers,
Redom

 

LoL if APRA and ASIC had the same functions and roles then they would not be separate. No points for pointing out their differences.

I'm referring to specific comfirmation from specific lenders you personally know, that they are not affected by macropru.

Do you? Do you? Or you're just generalizing?

 

My post references certain lenders that have yet to change their calculators yet.

In lending, its not always the case that one institution holds all the decision making power for every loan. So its a little strong to say that they're completely unaffected in terms of overall policy and risk appetite, even though their calculator may remain the same. E.g. some of the mortgage managers insure their loans (regardless of their LVR), and that means another party is involved (the insurer).

If you're clear on what your trying to say i'd be more than happy to give my view.

Do you have any personal insight on some of these lenders (you mentioned FirstMac)? At this stage, some of these lenders are less 'known quantities' in the market space as they typically haven't been used much. Any info on them would be more than welcome.

Cheers,
Redom

 

Hi all, thinking oustide the box here and trying to find a solution.
If the lenders are tightening their belts, would it be to simplistic to aim for lower-priced properties to make things happen and keep momentum? I.e i see deals all the time in all price ranges.
Do you see any problem with doing 80% lend, cheap reno and pull equity to go again - but find the price range that will allow you to do that?
I take it you'll need to find a lender that will allow the equity pull happen, but what other issues will arise in this simple scenario?

 

That could work for some Andrew, but the problem with a buy cheap, renovate, pull equity strategy is this ... what if you now have little or no borrowing capacity post APRA? In that situation, how do you firstly fund the reno, and secondly pull the equity out after the reno? It's a chicken and egg situation. The first thought is- refinance to one of the lenders who still offer a very strong post APRA servicing calc policy, and voila! Homeloans Ltd, Firstmac, Pepper etc...

At first glance, this seems the easiest and most sensible solution available to many who have otherwise reached a capacity wall. But just to make it a little more difficult and generate some 2nd and 3rd glances, be aware that those remaining lenders with strong post APRA calcs ( Homeloans Ltd, Pepper, FM etc) are also the most conservative lenders, policy wise. They certainly aren't traditionally cash out "friendly". So while they do accommodate equity pulls, they do not make it available to the same degree as what many may be used to. And where they do facilitate cash out, expect to be asked to jump through significant hoops. There wont be any shortcuts .

 

Is it possible that most lenders will stop equity pulls on IP's?. Isn't this what ING have done or have misunderstood?

 

No you've got it right.

 

So now doing value adds and thinking your going pull the equity may soon be gone.

 

Well it'll probably still be around for a lot of banks but it may now be dangerous to assume it as part of your strategy.

 

My IP which I planned on doing a value add is with you guessed it ING.

 

Right now it's still available, provided you have the capacity on the new servicing calcs. But it seems to be one of the areas most brokers on here agree, may be the next to be curtailed.
Long story short - if you have plans to do reno's or value adds , it's probably very wise to pull whatever equity you are able to - now.

 

(long post with stats to make a vague point )

I found that my problem with planning (regular) equity pull to grow the portfolio is the new serviceability calcs (assuming your lender even allows pull!).

For example, assume
- a $500,000 value with $400,000 IO loan (80% LVR, no LMI)
- Interest 4.5%.
- Rent $500pw.

In the old days (about 2 weeks ago ), with some lenders having rent taken at actual, repayments at actual, and neg gearing taken into account, the total serviceability hit of that property could have been about -$36pw, or little impact on growing portfolio based on serviceability.

In the new lending climate, with rent taken at 70%, repayments taken at 7.2% principal AND interest, and no negative gearing taken into account, the serviceability hit for one property would be about -$466pw.

On an income of $100,000 with no other debts at all, nett income before living expenses is $1440pw.
So -$466 would be a huge, huge hit to serviceabilty and growing *any* portfolio.


So to grow the portfolio, let's say our answer is we'll only look at *very* good yielding property to improve serviceability, say 10% yield. In the same scenario at 10% yield the serivceability hit is still -$143: much better, but I'm still taking a hit on every property against serviceability and probably not building a very large portfolio quickly. Not to mention good luck finding (m)any $500,000 properties yielding 10% .


Let's try another answer for growth - only go for cheaper properties away from CBD and get that amazing 10% yield. The new scenario is:
- house $300,000 with $240,000 loan
- rent $576 (10% gross yield)

The impact on serviceability a month or more ago would have been +$150pw, but is now -$191pw.
Old = grow quickly (assuming you've got the deposits );
New = heavily impacted in growing a large portfolio quickly. You could still get a few $300,000 at 10% yield, but not many before your serviceability ends.


The answer would seem to be: if you want a multi-million dollar portfolio then each new IP has to be with lenders who don't apply the new serviceability rules. Put your first IP with one of the big4 who will apply the rules, but choose one who (at the moment anyway) allows equity release. Then every IP thereafter probably needs to be with other lenders.

The difference to before seems to be that the change to using non-big4 probably has to happen much, much earlier . Oh, and it has to be one that allows equity release (and hopefully still will when you need it).


Assuming your bank(s) allow equity pulls, let's pretend CG continues as before. It means nothing much changes as regards to having access to equity to grow the portfolio.
But that just assist the deposits, the serviceabilty is more based on income which is largely rent-dependent; even if rents could possibly go up quickly, only 70% of that is counted in the new calculator, so an increase from $500pw to $550pw in rent would benefit serviceability from -$466 only to -$450 (mgmt fees increase, etc.) which is negligable.

It would take many, many years of rent rises to build up serviceability.

You could probably build a bigger portfolio more quickly by using the equity for much lower LVRs (60% say) than waiting for serviceability to increase! (would bring serviceability down from -$466 to -$310 - still urk!).

 

I have used NRAS to cater for these changes - knew 3 years ago this capacity constraint would come. It was only ever a matter of time. I spent the best part of a decade as a senior BDM at Firstmac, and years with HSBC and Aussie before that, so I have a fair idea about mortgages, but more importantly the funding arrangements and mechanics behind mortgages. Any serious people in the top echelons of banking have known for years that the expansion in credit was at an end. Only large rate cuts deferred it for Australia for the past 2-3 years.

But the regulators were slow to respond, and I have used the pre APRA period to build up a portfolio of a dozen properties that generates more than 100K CF+ tax free per year ( on top of my income) which I have then used to pay down my PPOR mortgage in less than 2 years. I am now paying down 2 investment properties in full , which are not at all tax effective as I have owned them both over a decade. ie I am using NRAS to dramatically reduce the least effective debt I have. The removal of that debt does 2 things

1. It creates equity even where growth doesnt occur
2. It creates borrowing capacity that wouldnt otherwise exist.

So here's one way to get ahead of the curve in this new environment.... you'd be starting very very late- but better late than never. It's so simple to do, but for some reason most people just cant get their head around it

1. draw out all the equity you can right now, against your PPOR - this should be set aside to fund 20% deposit + stamp duty to be used towards NRAS purchases
2. Wait 6 months then refinance to FM ( after you have 6 months good conduct on your loan)
3. Once FM holds your PPOR - purchase NRAS at 80% LVR. FM will allow you to use "actuals" on all existing debt, 80% of the NRAS rent ( so 65% of market rent) and 80% of the NRAS credit as tax free income - which equates to @ 12K of additional taxable income. This combination provides HUGELY superior capacity than any other combination at any lender. It did so by a massive margin, pre APRA, so you can imagine how significant the advantage is post APRA
4. 12 months later, you will start to see the results. Large surplus amounts will arrive in your bank account - dont spend them. Redeploy them into the Offset of your PPOR. Hammer down the debt.
5. Be patient. It will take a few years for you to see big results. But they will come. And while the APRA induced period of blah goes on, you will be getting further and further ahead of the curve, positioned to act decisively when the credit policies relax, as they eventually will again.

Of course, none of this is as "sexy" as a quick growth strategy everyone has become used to in the easy credit period of the past 2-3 decades, but as I have said many times- remove the fuel that drove that and the fire will burn less brightly. NRAS is an accelerant that will add significant cash flow fuel back onto the fire. In other words- Im using NRAS as a tax free dividend reinvestment plan, but without the risk of margin calls or market volatility.

There will be many cynics - always are- but I've built a $6mil portfolio in 2 years doing this. I have paid down my PPOR in 2 years doing this. I am generating 6 figures tax free doing this. All underpinned by a fundamental core belief that with the credit boom being over, this is the best way for me to manufacture significant wealth if capital growth slows.

 

Forgive my ignorance but what is FM?

 

Sounds ****ING annoying. I wonder if they prepped their new ad with this in mind?

https://www.facebook.com/video.php?v=941814525839769

 

euro73, to buy a nras ip (normal ip is 300k a nras will be 350k) thats why i don't and many i know don't buy nras or defence housing as there is a big premium you pay for purchase.

for me i can't get past the price point alone. what are your thoughts on the premium?