Property Investing Tips in a Changing Market..

Mine are 10 years into I/O...so unlikely to be extended..

So did the song and dance....about hpw hard it is...and blah ...blah...about refinancing..it is with retention now.....worst case is 3.89% fixed for 2 or 3 years P&I ......I am fully offset...lets see what happens......interesting times indeed......

 

Are they just trying to get you onto P&I and won’t let you change back to IO?

 

I hope not lol, There's a chance that I might get caught if they make the change in the next few days and required a reassessment to get back to IO. In that case, I am screwed lol.

 

Interesting and informative post (about the finance part!).

In general, the finance guidelines you've mentioned are quite useful for a targeted to a segment of the audience. I think its worth adding a little more context to it though, especially for the general audience.

• Those tips are fantastic for those who seek to maximise portfolio size as their way of investing. This is obviously an aggressive strategy that has high risk/high returns. Generally, 99% of households don't go down this path.
• You should have a high level of experience and sophistication to their investing strategy. For those that don't have this, your playing a very risky game otherwise applying finance strategies that will help you leverage to the hilt.
• Should have appropriate risk buffers in place, largely tied to the debt arrangements the borrower has. With this type of financing goal & motive, you're walking down a road a dangerous road if your not well prepared for changing circumstances (e.g. P&I rollovers, rate rises, changes to credit environments, market downward revisions, etc).

The key to maximising portfolio size in your post appears to be based around serviceability & risk management. IMO one of the keys to managing serviceability and portfolio expansion is knowledge of the marketplaces serviceability framework. You've clearly got a unique feel for this (noting the utilisation of specific non-banks who use actual repayments).

Applying some of your principles to the day to day of broker life - in the 2018 macro context of slower credit growth, declining values, etc - there's more and more borrowers who are seeking to protect, preserve and hold what they have, rather than aggressively accumulate more (2014 environment).

 

@sash need to clarify more on this. Why do you consider them a quick turn over lenders and not long term? whats the risk?

 

They are known to have higher rates as they are more lenders of last resort ...last cycle these lenders moved rates much faster than others.

 

Great question @hash_investor. Its about the risks associated with debt management.

If your down this aggressive path it will mean:

• Higher rates initially, often with limited fixing options
• These lenders have outlier policy settings outside standard APRA guidance - potentially subject to change at any time. APRA have the ability to regulate their lending standards if they choose to.
• Going to these lenders for serviceability means that you cannot access mainstream finance anymore, and hence any changes in loan terms with your mainstream lenders need to be accounted for (i.e. P&I rollovers). The exit strategy you have in place should therefore be built around getting back within mainstream lender guidelines. Leverage outside their comfort parameters may mean your subject to changes in your loan terms.
• Funding generally secured in securitised markets only, i.e. funding source has greater volatility of rate movement
• Weaker balance sheets of lenders, increasing risk of potential debt sell off at some point at harsher loan terms.

In general, i think exit strategy may be a bit of a simplistic way to look at it. Other paramaters to managing the risk associated with having your leverage geared outside standard lending frameworks include:

Your LVR: If your above 80 on some parts of your portfolio and outside lender parameters, it increases the finance risk in your portfolio.

Your repayment type across your portfolio: @sash mentions having your portfolio on IO. This is necessary to maximise these calculators. However, it also adds risk to your debt arrangements as now you have entered into a loan contract that has a repayment rise scheduled into it. If you have a repayment rise across your portfolio at similar times, you can create your own liquidity crunch. This needs to be prepared for ACROSS your portfolio, not just the individual loan.

Buffer sizes in offsets, income surplus's, insurances, etc - generally the best risk management tool.

 

Good point....don't let all your loans come off I/O at once..especially if you have over 5 properties.

Thus the need for an entry and exit strategy as well as a finance strategy.

I have a 7 figure cash buffer as a result...to handle this sort of situation...but even before to get there I am starting to sell down....most of my loans have at least 6 plus years of I/O. Though I will probably increase debt by $1m...in the next 12 months...in the next 42 months ...I plan to reduced debt in the order of $2.5m to $3.2m.

As for the liquidty crunch..it is comin; folks...you are going to see a lot of investors who have not planned for this get hit.

 

I am more worry about those who brought their 2 mil+ ppor home on a 1.6 IO mil+ loan back in the glory days. No rent to subsidize interest repayments, those IO loans can't be extended beyond 5 years and value are decreasing. Hence why upper northshore properties are in a freefall. My wife heard lots of complaints in community forums at that end of the town saying 300k salaries are just enough to make end meet. Imagine those loans are rolling over to P&I.

 

Yep...hearin' that......its happenin' in Upper North Shore, Inner West, Eastern Suburbs...for that matter everywhere hearin' the same stories. Had to bite my finger to stop my myself from rollin' on the floor laugin'

You think it is bad...watch China..it is going to be carnage in their property market...most of dem are gamblers.....

 

In China its hard not to get greedy when property value increase 5 folds in the space of a decade, make our boom looks like a minor bump. That's why Chinese investors were so bullish here too.

 

They are about to learn the hard way like the Japanese....

 

Yeah there's definitely asset bubble over there. But hopefully hard landing can be avoided.
Otherwise we are in trouble too lol.

 

Hi Sash.
Love your enthusiasm. With full offsets in place, is negotiating the lower interest rate a strategic play as you will be using the offset cash elsewhere soon? Where will you be deploying the cash can I ask?

 

Nah...China will take a hit......they are in the same situation as Japan...in denial.....

 

I will use some for smaller developments...but rest will be left in place for retirement income.

Then there is of course..there is the charity wirk..working with @datto of Duie Progress Organization to clean up the Druie ... it seems that the real issue is places like St Clair and St Marys...the entitled Bogans are crapping on the ole Druie resos...

 

I would prefer a bust over a 20+ lost years as happening in Japan.

 

Japan had a bust (60 to 70% off property in the major cities), followed by two lost decades.

 

Yep ...it will not recover unless they accept immigrants...

 

Taking head is good, but taking heed might be better.