Minimal rental return that has no impact on borrowing capacity

At what percentage of rental return serviceability is not impacted at all? E.g. 8% Do other factors need to be taken into the equation even if the rental return is over 10%?

 

Yes other factors will ocme into it
Liiving expenses
Credit card debts
leases
dependants
length of remaning loan terms

 

10-12%. (80% of plug rate, 7.5/8% 25/30 years p&i).

Remember lots of lenders have a max yield they use in their calculators.

 

Depends on lender, as a very ballpark example on existing loans only with property in a normal risk area (we take out all other factors at the moment), take Westpac, say your existing loan limit is $400k paying 4% interest on interest only, your repayment would be $1333.33 per month, then they add a 0.19% monthly buffer, which means you are serviced at $2093.33 per month, as they only take 80% of your rental, that means you would need $605 per week rent to break even on a $400k loan paying 4% interest in terms of serviceability.

 

This is assuming the borrower has minimal living expenses with no dependants.

 

Im wondering , 1 year after the changes started, how many investors who didnt think servicing was a problem, are now finding it is?

I suspect that many who thought the regulatory changes were a whole lot of noise about nothing , hadn't tried to borrow for a while, and are only now realising the changes are very real, as they try to borrow again or renew I/O terms.....

 

To be clearer, get a repayment over 25years at 8% on your likely loan amount. If this is less than 80% of the rent, then with some lenders the investment purchase will actually increase or be neutral to your capacity for the next purchase.

I'm guessing very few normal residential properties have this kind of yeild.

 

Lots :-(

I remember a year or so ago I'd take a look at a Fact Find and know almost instantly whether the clients equity/incomes would enable them to reach their goals. These days - it ain't so easy.

 

Today's rule of thumb is, "If you're an investor with existing properties, you can't borrow anything until proven otherwise."

 

There is always the option to purchase at a lower LVR to increase yield or pay down debt to increase yield. I have done both in the last 12 months.

 

10-12% , and thats IF a bank will accept that yield. Most have caps.

Ive only written about this topic say...oh.... 150 times in the past few months.... Here are your options for improving your borrowing capacity;

Reduce debt - you can achieve this from a lottery win, an inheritence, or by strategically and deliberately purchasing cash flow + properties that will pay down debt in a more aggressive manner than your salary and a "vanilla" property with "vanilla" cash flow, allows.... this means NRAS or dual occupancy. No other form of CF+ resi property comes close to the cash flow results these produce. These options should produce @ 9-10K CF+ tax free- which equates to a 13 - 14K pay rise before tax.

Increase income substantially - You can do this by career advancement/payrises, or 2nd income (but many banks wont accept all the 2nd income so dont just assume this is an effective strategy) or by purchasing NRAS or dual occ- as each purchase will add 9-10K of tax free income to your household income.

Removing debt and/or increasing income are the solutions... or there is one final option - sell .

 

Thanks. 0.19% buffer? How come 1333 becomes 2093? 1333 x 1.57 = 2093

 

It is becoming harder to get loans and build a big portfolio. Borrowing capacity becomes the bottleneck.

 

That is an option when you reach the maximum serviceability. I still want to use the hard saved money as deposit as much as I can.

 

That's because the 0.19% buffer is added to the loan amount, so $1333 is your actual payment then you plus buffer to the "loan amount", not the repayment amount (i.e. 0.19% x $400,000 = $760), so end result is $1333 + $760 = $2093 serviceability per month.

 

only if you ignore debt reduction

 

Property is an attractive investment because of the gearing available. Putting in a larger deposit or aggressive debt reduction makes property less enticing an investment.

 

Its one way to view it. I would argue that property is attractive to many investors because it's a relatively easy and extremely accessible investment because of the gearing available. But it's real attractiveness lies in its potential for gains....

You are arguing on a "per property" basis. ie a transactional basis. And if we limit ourselves to a transactional point of view, you would be right.... but I am not a transactional thinker. I am a "portfolio wide" thinker .... and I'm trying to have less experienced readers of the forums think beyond the next transaction... and consider the game of snooker /pool they need to play to get where they want to get.

A transactional argument is like suggesting that the simplest or most obvious "next" shot on the table should be taken, but without necessarily giving consideration for where the white ball is positioned for the shot after that, or the shot after that. I see that as transactional and short sighted. My argument is that the person who clears all the balls off the table wins the game, so taking the simplest or most obvious or most popular shot isn't always the right shot.

Here's all the evidence required. If you ignore debt reduction - this is how the two different games of snooker will play out, assuming all other things being equal. ie Income, credit card limits, HEM's, dependents etc.

You and your clients go ahead and gear up so you can feel you have the most "attractive" version of property investment, and never pay anything off so you can feel that you are get maximum attractiveness on a "per property/transactional" basis...

While you are playing that particular game, me and my clients will go ahead and gear up as well, but we will concentrate on paying down debt along the way, using the large tax free surpluses generated annually by our portfolio's ( underpinned by NRAS, and dual occupancy from next year) to pay down debt, creating equity and borrowing capacity as we go....... so we will match you for gearing, beat you for deductions ( 20% less rent) and then beat you for after tax surpluses.... ( NRAS credits) but most importantly, we will beat you for debt reduction if we reinvest those surpluses for that purpose...

Fast forward a few years, and I put it to you that again, all other things being equal. ie Income, credit card limits, HEM's, dependents etc. my clients, who will have paid down far more debt than your clients, will have the ability to add further properties to their portfolio before yours will.

The point is - everyone has to start getting their heads fairly and squarely around the reality of the credit environment we are in, and let go of old doctrines. rather than trying to emulate the buy, hold, reap, buy again, hold, reap , repeat over and over again strategies that built so many great portfolios for so many of the successful older investors here, newer investors need to think differently about how to grow their portfolio's over the next decade or two... we are entering a completely inverted set of credit rules.. You are not going to enjoy ever falling rates, ever falling assessment rates, ever rising incomes, ever expending LVR's. if you dont deleverage as you go, you are going to get snookered and your only choice will be to sell off properties and start a new game, or put the cue in the rack. if you goal is to grow a large enough portfolio with strong enough yields that you can start replacing your salary income with investment income, you need to start approaching property as a dividend reinvestment plan... constantly channeling all "profits" back into the portfolio, so it can grow and grow...

 

I wasn't arguing with the current credit tightening. I was making the observation that the main factor many investors are drawn to it was/is the gearing available. to be able to put in 10% and have the property grow by 10% in a year is a ROI of 100%. Borrow the deposit from equity, and the ROI is infinity. Putting in 30% or 40% or aggressive debt reduction plans means the ROI drops, which means you may as well gear an index fund, IMHO.

Im not transnational BTW, im a buy and hold person. the long game when I started was buy investment properties using equity and negative gearing, dont pay down inv debt, just get more. It worked.

What is going to work for investors starting now? Not sure, time will tell.

 

That theory only works if borrowing capacity is also infinity...

Even at 20% deposits + stamp duty, NRAS yields typically represent 8-10% tax free returns on the amount invested... and that's before any growth ... indexed funds cant offer that in a low rate environment like this without capital risk/volatility.

But more broadly, the philosophy I am promoting is about portfolio expansion.... the outcome of debt reduction shouldn't be viewed as a reduction in ROI. It's outcome should be viewed as an expansion of capacity, and therefore an expansion of portfolio size.

I would also point out that the debt reduction should be focused on non deductible debt first, meaning no reduction whatsoever in INV property ROI....

No different to any other dividend reinvestment plan.... in the end it reaps serious ,serious benefits

So again, if 3,4,5 properties generating high ROI is what appeals, that's fine, but I'd rather 10 + properties than 3,4 or 5 - especially if we are considering all other things to be equal...


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