The secret to buying multiple properties: Don’t use the same bank.
At this point, it is important to point out a very important rule – where possible try not to use the same bank! If you go to Bank “A” and ask for the money for your next property they will welcome you with open arms. But they will not structure it the way we have suggested.
Instead, they will offer you a loan for 100% of the purchase price and all of the costs. So in our example, they may lend you $400,000 plus the $20,000 costs, or a total of $420,000. And then what they will do is what they call “cross-collateralise” your two properties together. What that basically means is that if you default on the mortgage on one property, they can sell both of them to get their money back! Now that’s not a good situation to be in if one of those properties is your home.
Furthermore, and this is the most important thing to note, they will keep cross-collateralising your properties until you get to about four. Then they will STOP lending you money! Because at about that point, you become too big a risk to them. If you fall over in one day, they lose four mortgages on that day.
Worse still, the other banks won’t be interested in you either, because you are overexposed to the first bank. The best policy is to simply only use one lender for each property. There are approximately 150 lenders in Australia, so you can have 150 properties before you run out of lenders and you have to go back to the first one again!
Sometimes when pushing the growth of your portfolio aggressively you may have no choice but to go to the same bank for a second, or maybe even a third, but you should really try not to.
Only buy properties that pay for themselves. How do you do that?
A property that pays for itself is one where the rent and tax return received from the property exceed the costs of holding the property such as loan interest, rates, insurance etc.
Never buy properties that don’t pay for themselves.
Obviously, an investor can own an unlimited number of properties that pay for themselves, but will soon run out of money if they have to tip in their own cash to make up the difference.
It is important to remember also that any property can be made to pay for itself by reducing the amount of money owed against it, and thus the interest charged against the loan. Also, all negative properties will eventually start paying for themselves as the rent increases and if the loan decreases. The only true way to tell if a property is going to pay for itself is to add up all the expenses and compare them to the rent and tax return received.
A word of caution when it comes to property investment and Financial Advisors. ‘Financial Advisors’ don’t really advise you on all things ‘financial’.
They normally only deal in shares and insurance. As such they most likely try to steer you away from property (because they don’t get paid for it) and into something they deal with. The only problem is that, as any experienced property investor will tell you, it’s very hard for anything else to compete with property once you consider the effect of leverage and tax benefits.
Successful property tip! Investors buy time not properties.
Now this is a very important lesson to note if you wish to be a successful property investor. Successful property investors know that the real aim of the exercise is not actually to buy properties. Of course, buying properties is necessary but it’s not the key to success.
The real aim is to buy time! Successful investors know that if they can hold their portfolio long enough they will make more money than they need to deal with any problem that comes up. The main way to buy time is to maintain a healthy cash buffer.
Interest rates will rise, and they will fall again. Unforeseen maintenance problems will present themselves. Rental vacancies will occur. All these things will happen, but we don’t let them deter us from investing in property. Because if we do that, we won’t make any money at all!
The main strategy to deal with all these risks is to maintain a large cash buffer. One way is to establish a bank account, such as an offset account against a mortgage or a line of credit, and make sure you have some cash in there. Throughout the year you can use that cash to pay for unforeseen expenses, and then come tax time, when you get your big property investors’ tax return, top the buffer up again.
Too many inexperienced property investors go out and buy as many properties as possible and leave no cash in reserve. They soon get caught out and have to sell a property or even default on a mortgage. Don’t let that happen to you!
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~Integrity Team
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