Since the lenders cracked down on popular options like interest-only loans, finding creative finance strategies for growing your property investment portfolio has become more important than ever.
As an investor, how you set up your finances can have a huge impact on the success of your property portfolio. In this article, we share a few property investment finance tips that every savvy property investor should know about.
1. Take precautions to keep your own home safe
Many people make the mistake of using their own home as the initial collateral in a property investment finance strategy, however it’s a good idea to keep your own home separate. If your investment strategy should go belly-up (in the worst-case scenario), you won’t find yourself having to move back in with Mum and Dad.
It’s a much better idea to refinance your home loan to access the equity in your own home and use that as a deposit on an independent property investment loan. Keeping things separate will also help you to maximise the tax advantages that property investment brings. (Talk with your accountant for more information).
2. Use multiple lenders and stand-alone loans
Cross-collateralisation is when more than one property is used to secure a loan or multiple loans. You can also be at risk of cross-collateralising if you use the same lender for all your loans, even if you finance them independently of each other.
Cross-collateralisation can lead to several problems:
- If property prices should fall, the lender may ask you to top up your deposits on all your investment properties at once.
- It may limit the way sale proceeds can be used (for example, the lender might insist that you use the funds to pay down other loans in your portfolio).
- All the properties in a cross-collateralised portfolio may need to be re-valued whenever one is released or refinanced, which can be costly.
- The lender may limit the type of products on offer as your debt with them increases (for example, restricting future loans to Principal & Interest).
- Lender fees may be higher with cross-collateralised loans.
- There may be constraints with equity access.
The answer? Use a variety of different lenders for your finance and insist on stand-alone loans using each individual property as security. A good mortgage broker can save you a considerable amount of time researching and approaching suitable lenders.
3. Invest in different states and locations
Australia is made up of hundreds of property markets, all performing differently. If you invest in multiple states and locations, you’ll help to minimise the risk of all your investment properties experiencing a value downturn at the same time – which could bring your investment strategy to a grinding halt. For example, property values in Melbourne and Sydney are experiencing a temporary dip right now, whereas property values in Hobart are still experiencing growth.
If you also finance your loans with a number of different lenders in each state where you invest (as mentioned above), you’ll be able to access equity from investments in capital growth areas to purchase more property. Even if some of your properties are experiencing value declines, you’ll still be able to continue investing. You may even be able to use your equity to grab bargains in markets where property prices are experiencing a temporary dip, as an additional flexible strategy to maximise your long-term returns.
4. Get professional advice
Property investment can be a good way to build wealth when done right. It’s always a good idea to speak to a financial planner and tax accountant before making any property investment decisions. Your mortgage broker can help with your financing strategy and will work with your other professional advisers if necessary. They provide invaluable advice to help you structure your loans correctly to protect your interests and to suit your investment goals. If you’d like to know more, please get in touch with your mortgage broker today.