Hi Folks,
may I request your advice on the best way for me to assess my available equity without actually applying for a new loan?Situation;
PPOR
IP1 (settled in Oct 10)
IP2 (settled in Feb 11)
LVR across portfolio based on current valuations as at recent purchase of IP2 is 80%
I keep 80% LVR across portfolio as the line in the sand. Will not go below at this point.
I believe that IP2 was purchased well under market value and thus may have significant "idle" equity that I could harvest.
All loans crossed. (And I am happy with it that way as it fits my circumstances)
Plenty of serviceability. All IP's CF+Challenge;
How do I determine how much equity I have available without actually applying for a new loan?
This raises a larger question ongoing in my mind about how I determine at any point in time, how much equity I have across my portfolio, thus enabling my next purchase. This is an important process for me to master as I intend on purchasing a further 6-8 properties in the next 3-4 years.
Note: I am not asking about the mathematics, I understand this. I am trying to understand the different "process" options that I could use to determine how much "spare" equity I have above the 80% LVR principle I have set on my portfolio.Current thoughts;
1. My mortgage broker can get my properties re-valued through the bank I use for free. Perhaps I just have them do that? My only concern is that they will just be doing what they did at the last valuation/settlement in Feb 11 for IP2. So why would the valuation be any different than what they lent me?
2. I order my own valuation. But this really doesn't achieve much because the bank may not recognise it. And I have to pay for it. (If I do, is it tax deductible as it is an investment finance expense?)Any advice or ideas greatly appreciated,
EmptyvesselFrom what i understand the banks won't do a top up on loans within 6 months of settlement, some require you to wait for a year, but the experts in this area will probably answer you further on that one.
With your second option, HTW (Herron Todd White) are one of the valuers most banks use. You could order your own valuation through them and the bank will charge you approx $90 to audit it, if they are happy with it and provided you meet their servicibility and other criteria then they will honour it, but again, I'm not sure if they would within the first 6 to 12 months. After a year I'm sure they'll be fine. The other option is to go to a different bank if you want to get access to the equity within the first 6 to 12 months.
To work out equity:
Equity = Value – loans
Equity available for use would be, keeping LVR at 80%:
= (value x 80%) – (existing loans)Crossing your loans will hold you back and not allow you to borrow any more. Best to uncross them asap, and especially become you buy another property and they become even more tangled.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Hi emptyvessel
I would advise going to your mortgage broker and getting the vals done for free to assess your equity. The broker will be able to assist you without creating an application.
Totally agree with Terry that crossing the loans will hold you back especially if you dont agree with the Banks valuation.
Suprised your Mortgage Broker recommended that course of action.
Get him to organise the new free valuation and draw down the increased equity. If the property was purchased that far under markey value you should have an issue.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Emptyvessel- Best to uncross if you can especially if you plan to expand in the next 3-4 days.
I wont go into the math of the available equity, since Terry has covered that part already; But if your interested in HOW to use this available equity or the process, i will give you a very quick run down on a simple and common equity release- there are plenty of another creative ways ( IO, LOC, Portability loans…ect), depending on your situations.
1. Once you determine how much available equity you have- apply for either a top up or REFIN, and split the loan as 2 payment- which lender you choose will depend on your “purpose”.
2. Use the spare funds for another investment.-Repeat for next place….but you must be able to service the loan
in regards to getting other valuation done in a short period of time, it’s fine as long as you have a good reason to- ie you have done some renovations- You be surprised i help a client reorder another valuation 4 month after settlement because he spent $10,000 on renovation ( well documented) – and this increase the property valuation by a whooping $170,000! allowing them to buy another property in a short period of time.
You never know if you never try- but of courses do it in a smart one…ie get a free/discounted valuation…and no CR checks..
If you order your own Valuation yes it’s tax deductible for IP’s, and no the bank will not use them, but you can use them to “dispute ” a bank’s valuation if there is a huge difference.
Regards
MichaelMick C | Shape Home Loans
http://www.shapehomeloans.com.au/
Email Me | Phone MeSame Banks. Better Rates. Served With a Passion.
Thanks for the advice guys.
No need for the math. If you read carefully, I did mention that I understand this part
That said, no harm putting it in for other readers.The simple process you described is essentially the one my broker is proposing. I will wait a couple of months before proceeding as I have a reasonably large tax bill to address first. Also finishing some renovations on my PPOR that will assist in this department as well.
As for uncrossing, I will make a separate post about this because I do want to hear a methodical explanation of *exactly* why, rather than the vague, half-cooked boogieman stories I usually read such as;
– You don't want to get restricted by a single lender. (How exactly? Is this the same if I have a high income, buy only CF+ property and never intend to sell? )
– That one lender will stop lending to you. (Under what circumstances exactly?)
– It is just a bad idea. (Uh huh, why is that exactly?)
– Releasing equity will be more difficult, like the scenario I posted above. (Is it really that much harder? Doesn't seem so)
– Asset protection (It would be nice to hear the actual, precise scenarios I am being protected from. Then I can decide if they apply to me)
– All the successful investors do it. (Yes, but many do not. So that isn't a reason)
– I have helped a bunch of clients that were hopelessly crossed and restricted. (Who are these people exactly? Can I talk to them and were their circumstances the same as mine?)I am not completely against it, I am just wary of Fear, Uncertainty and Doubt (FUD) that isn't validated by specific supporting information that can be independently verified. I also I have never seen a complete logical treatment of the topic which was followed through until all arguments had been presented and tested in a critical and logical fashion. If you know of a great thread that does this, please point me to it. I like to read.
Thanks again for the kind advice.
Here is the main reason not to cross collateralise:
Imagine you have two properties. Each valued at $100,000 with a loan of $90,000 each. ie 90% LVR, with the two loans cross collateralised.
Now imagine you get into some financial trouble. You must sell one or both properties to reduce your monthly expenditures. But the values have dropped or you can only find a buyer willing to pay $95,000.
You sign contracts and sell the first property. Then you send off a discharge form to the bank. The bank arses you around and says they will only release the property if you can supply updated payslips and they will need a new valuation done on the remaining one.
2 days before settlement the bank says since the value of the remaining one is now $90,000 you will need to reduce the loan on this one to $81,000 to keep it at 90%.
So in addition to getting virtually no money from the first one you will need to come up with $8k to pay down the loan on the second one just so that you can sell the first one. Think of the tax consequences of being forced to do this. Think of the consequnces if you cannot afford to sell the first one with settlement being a few days away.
This is happening a lot these days. one of my friends was forced into bankruptcy because of cross collateralisation.
Other reasons:
– you will be limited to one bank as other banks will not take security, generally, of a mortgage over property that is already mortgaged to another bank.– One lender will stop lending to you eventually. Each bank has different policies so you may be able to get a loan somewhere else – but this will be hard if you cannot move a property or two over.
– Asset protection – see above. Imagine if there were 2 banks involved.
– etc
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Emptyvessel -from a consumer’s point of view and someone who has NOT yet been bunrt by the bank i understand where your coming from. But it’s common for banks to:
1. Stop lending to you- once you reach a “certain” threshold, especially your income DOES NOT increase and your relying heavily on your rent and capital growth – they see this as a risk…if you lose your job they potential will lose a lot of money if they hold 5-6 properties under their belt…..they prefer to spread the risk at a certain point- depending on the client.
2. If the rate increased for that ONE lender- ie look at what CBA did !!! 0.45%…..all your properties will be hit- wouldn’t you want to spread the risk? …reason why people buy in different states and buy different types of shares..
3. If you wanted to buy a unique property- ie a studio accommodation or a commercial property, the bank your dealing with might not lend for that sort of property type- so you might be force to “untangle” your properties anyway in order to go to a different funder ( as terry mention, no banks is willing to be 2nd mortgage)
4. If your force to sell due to financial problems- see terry example above.
All good if you have NO problem…but when a problem arise- you better watch out. All about risk prevention. and asset protection.- if you can WHY NOT?
Regards
MichaelMick C | Shape Home Loans
http://www.shapehomeloans.com.au/
Email Me | Phone MeSame Banks. Better Rates. Served With a Passion.
Interesting stuff. I think this warrants further investigation. You guys are great. Just can't believe the willingness to share advice and help others move to greater success. I am humbled.
I did some trawling through older threads on similar topics and I found a couple of people that seem to have used a hybrid approach with great success. Essentially they boil down to this;
1) First 3-4 properties are all crossed and are the core "equity" engine. Limited by serviceability rather than equity, but growing at a rate that fits their acquisition timeframe.
2) Subsequent properties are compartmentalised into separate loans and trust structures.
3) LVR is lower risk level with a max at 80% across the portfolio.
4) Bread and butter, buy and hold, CF+ strategy. No development, moderate capital growth, no huge buy, add value and sell strategies. (Selling doesn't work for me due to the tax damage unless I get into complex trust/company structures, which I might do, just not yet cause I am busy with a daytime job that earns me plenty.)
5) Accumulation of less than 20 properties. (Not trying to break any records or become the next Steve McKnight)Some other "crossed" folks have had no problems selling properties or transferring securities and they use the same lender I do. Which is encouraging because they seem to be going strong after a few years. I will get in touch with a few more of these like-minded people to see where they are now and hopefully learn from them.
Didn't come across a single thread from anyone that had major problems as a result of this kind of structure. Some hearsay, which I don't put much faith in. It is possible they don't talk about it, but I highly doubt that given the opinions expressed freely on this forum.
In summary,
I like the 1-5 approach above, it suits me for now. But I am going to get into a deeper investigation of how my structure might look, and more importantly, what is the overhead for me to operate. Then examine the benefits objectively to draw a conclusion as to whether my strategy needs to be altered, if at all.Will let you know how I get on. My plan has about 9 years to run at this stage, so plenty of time to share war stories.
Thanks again folks,
emptyvesselPersonally i did something similar to the above 5 points as well i have to admit.
Property 1 – Used my parent’s as guarantor …was only 19 so yea needed a bit of help
Property 2 – after 1 year, bought my 2nd one on my own.Property 1 went up in value- release parents as guarantor
Used the equity of property 1 and CROSSING property 1 to buy property 3 and 4 – due to lack of funds and sightly high LVR.
When i was making a stable good income, with a good deposit- uncrossed property 3 and 4 – and went into property development.- currently in the process of building a small block of units.
So as you can- crossing does work, and has many advantages- but if you don’t need to- dont….if it saves you a lot of $$ and your able to enter the property market because of crossing; then it’s also not to bad.
Regards
MichaelMick C | Shape Home Loans
http://www.shapehomeloans.com.au/
Email Me | Phone MeSame Banks. Better Rates. Served With a Passion.
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