How to grow an investment portfolio with limited Equity

It is also true that on a yield per $ invested to buy a property, the yield tends to be greater at the lower end of the market. For example, you will typically be able to get yields in 6 to 7% range on properties under $350k. This type of yield is much harder to achieve (generally) on properties over $500k, which tend to be in the so-called "capital growth" inner-ring to middle-ring areas.

This increased cashflow from better yields is very important when on a tight budget and even more important due to the changes in servicability calcs caused by APRA.

 

Good strategy @Corey Batt have a few clients who are gun at it, helps that they're very handy and hardworking.


I have a great 'strategy' for the right investor that I use. Usually works best with a 80% LVR starting loan - but can work with higher LVR.

Have a client who's loan is settling tomorrow - here's what we have done.

Purchase Price $310,000 + purchase costs ~$17,000 = Total funds required $327,000
Borrowing 92% $285,200 + LMI $6,353 = $291,533
Funds required by client ~$41,800

The house has good bones large floor size, but not the best layout and is a little tired. The customer plans to spend ~$15-35k on renovations and expected end value based on comparable sales will be ~$400k+

Here's where the nice little 'niche' comes into play. Prior to purchase I completed a desktop valuation which can be used for 80% LVR and within 90days. This electronic valuation came back at $406,000. Which means client is able to borrow up to $324,800 total. So less existing loan of $291,533 they're able to borrow and extra $33267 @ $0 LMI. Will be completing a application after the purchase settlement.

So for $41,800 they have been able to get into a $400k+ property. Even better still is after the renovations will be able to complete a full/shortform valuation which will come back $400k+ and could potentially extract up to $49,000 equity (at a LMI cost of ~$6K) to purchase again.

I wouldn't do this for all clients unless I believe they had purchased BMV or knew that they were going to be improving the value of the property through renovation/development.

 

Brady, that is a great little strategy. Do they allow you to use a desktop when you have a full valuation in place?

 

Brady it would have been great if your clients could have settled on 80% LVR initially as they could have avoided that LMI totally.

 

Naturally the figures work exceptionally well in SA too - where the yields are a lot more forgiving extending the capacity just that bit more with a neutral/CF+ portfolio over the short to medium term.

In terms of the argument for sell down - it certainly has its place as a part of a strategy if used to reduce down non deductible debt. Selling down investments to buy others isn't as productive - as peak debt is still peak debt, it's just a shuffling of properties without any extra gain otherwise. This is great for the State revenue office receiving stamp duty and real estate agents earning their commissions, but not so much about building a larger portfolio.

There's the usual exceptions to the rule - developments etc - but these should generally be viewed from the perspective of a business, than a passive investment portfolio.

 

Do they not click that the AVM was done prior to purchase?
I would not like to be answering those questions if push came to shove - it sounds like a quick way to lose your accreditation to me?

Have you had any rejected based on the old val?

 

The catch will be jagging a valuer who is,,,,,,,,,,,,,,,,,,,errrrrrrrrr, good at his job.Good luck with that.A few examples
1)The valuer valued my timber frame home as a transportable.Came in 80k less than required.Made them re do the Val.
2) I recently bought a new PPOR.The val came in at $265k on the land, and $225k on the house making the val at purchase price of $490k.Liberty self insure the loan with LMI anything over 6 acres,the deal was knocked back because the LMI company policy was the home could not be less than 50% of the cost, we went back with a ammended val,they basically threw it in the bin...no deal.The valuer should have known the banks policies.
3) Same valuer,different deal.............asked my broker what was the figure to get the deal over the line,$250k was the answer, 24 hours later the val was produced at $220k

They live in a different world.

 

I agree - I was thinking more selling parts of development than B&H properties.

 

If you're dealing with Liberty, I'm certain they get their val and reduce by 'x'. Purchase is okay, refi not so much.

 

Purchase and a re fi on another property to extract the deposit.

 

The refi does not surprise me at all. Unfortunate about the purchase - sad thing is that when using Liberty there often aren't many great second options.

 

Yes desktop can be used - customer ordered valuation AVM.

Agreed, but they didn't have the $$$ available - they were originally going to do the renovations over 6-12months from savings until I discussed this option. Fair to say they were happy with it.

Agreed - good yields. And finding most desktops come back at good levels for established areas.

AVM can be used for 90days - can't see any issue with it at all. It's 80% LVR based on the electronic valuation which are acceptable.
No haven't had any rejected, no reason for them to be rejected. As long as they're within 90days.
If they're going to reject it because they have purchased at a lower price, then there really isn't a point in any desktop valuations.
Way I look at it is if the money is spend developing a system then back it
You're not going to get every AVM much higher then purchase price - the original purchase was a good deal that wasn't marketed well and bought with settlement just before EOFY (motivated sale)

I wouldn't be doing it for clients/properties that I thought weren't suitable - just like every other loan.

 

I am currently in this position myself with starting out my portfolio. I am relative strong cashflow position saving over $1000 a week that is being built up for another deposit. I hope to purchase 1 property per year just on the deposits I can generate and also hope the properties I have purchased previously continue to grow to help with creating deposits for more purchases. I like the idea of a renovation however being from Sydney I think the market has shot the mark and going to Adelaide or Brisbane trying to find deals and tradies to do the renovation is a daunting task.

 

Hi Guys,

I thought this might be the spot to throw my question in - any help would be greatly appreciated.

I have tried to ask finance specialists from my bank, and other banks, and the only response I get is "well come in and we can chat about switching your home loan over to _______."

The question I have is regarding equity.. I want to know approximately how much equity I may I have access to. My property is valued about $440k, and I am owing $330k on it. I paid a 7% deposit and it is owner occupied. One bloke has told me (trying to sign me up) that I have $80k usable equity, and another bloke has told me I have $6k maximum.

My idea of equity is that it is approx: house value (440k) - 20% of house price ($70k) - balance of loan (330k) = $40k equity.

OR

would it be 440k - balance of loan (330k) - my initial deposit?

I know it is all up to individual circumstances but no one will indicate what the answer might be.

Thanks anyway who can give me a little direction

 

"finance specialists from my bank" = doesn't make sense!

Equity = Value less loans
Potentially usable 'equity' = (Value x LVR) - existing loans.

For your example

$440,000 x 80% = $352,000
Less $330,000

$22,000 potential loan amount without incurring LMI

 

The equity in your property is the value minus what you owe. In your case it's $110k.

The equity you can practically access is 80% of the value, minus what you owe:
($440k x 80%) - $330k = $22k

In the case of very few lenders, you could practically access 90%:
($440k x 90%) - $330k = $66k

 

This is my exact issue.. Not so patiently trying to save another deposit so going to start doing some cheap renos while we save. Hopefully in a year or so we will have a deposit and possibly equity...but not relying on that happening for awhile yet (Perth). And for my own sanity as i hate the kitchen - Painting everything, new cupboard handles, new tapware, replace 80s benchtop and add a tile splashback. Attempting under $1000

 

Get a desktop val or two done on your property - they can come in high sometimes and may give you the equity you're after without the reno's.

 

For those looking for a real life example of how this scenario works - @joel wrote about his buy - reno - reval successful result here: Cheapie Reno - Smithfield SA