hi buddies.
Firstly , happy Valentines day everyone! Im going to a romantic dinner shortly but my mind is filled with the trouble that i cant borrow anymore ?!
Im in the middle of the same old, refinance etc . my broker told me that my borrwoing limit will be hit by end of 2015 after the next batch of purchasing. and that i wont be able to borrow anymore in 2016..
I still got enough euqity to achieve my goal set in 2016. , based on my sheet. ( from the pespecitve of equity deposit, paying off the debt using tax rebate/rent etc.) but my broker said now the rule ( NPIC or NPCC something like that) changed, the credit policy has tightened up. so Unless you can demonstrate a income ability rather than a strong equity poition, you simply cant borrow no matter how strong is your equity position. He said before you can use your euqity from other IP and borrow a lower % from a different lender , or use a low doc loan .. now those things no longer exist. you have to demonstrate the income , or you cant borrow.
Then I ‘ve been a bit depressed and googled late into the night. below are few options suggested.
1. using trust structure and company trustee, and you be the gurantor. common sense wise, I dont think this will actually increase your borrow limit since nothing has really changed even if you are a gurantor.. either way, the banks are the first needs to be paid in case of a default regardless of a personal ownership or trust ownerhsip. if I m a bank, I would make sure that gurantor can pay back debt if the trust default. so the trust gurantor will still use up your borrowing capacity same way as a personal name purchase. plus trust structure is not really suitble for me as majority of our income from PAYG rather than a business. I will let go a lot of tax incentive and higher land tax in NSW if go in a trust.
2. ‘foreign income’ ? some friends in the circle said you can claim as much as ‘ foreign income’ as you want and then your borrowing limit is unlimited , is this something new in the market that corresponding to the tightening rule ? this sounds like fraud to me and has anyone familiar with this approach?
3. My broker said i can either buy postive cashflow or buy off the plan and sell before settlment to make money in a bull market( suppose it is not subject to finance straight away until future). based on the banks buffer/discount, i need to have a very very postive cashflowed property in order to pass the bank’s testing mark.. . in that case, i would become buying the thing for the sake of buying more rather than buying where I want and think will grow in value. As for the off the plan strategy, i said to my broker that this is crazy thinking. it’s almost like buying into the futures market with a fixated delivery date and settlemnt price without a hedge. Silly and unnecessary.
I was thinking that if i can demonstrate to the bank that i can mange the cashflow and debt very well. will they think me as a safe person to do business with ? is this the right way of thinking ? my numbers are stack up (but not probalby from the banks system , considering the way they put buffer on top of interest, the discounted the rental cashflow ) .. I wonder how could someone buy 10 , 20, 30 and just keep going ? are they have different strategy or what ? but they must be at some point at my level and soemhow go past the hurdle …
is there something new that I dont knw ? Have I explored all my options already or must i go to the countryside now?
Or i need to go for a new broker ? lol…Will that make a difference or the market are really different now than before?
do you have any suggestions or insight?
thanks very much.
:-)
NCCP
Trusts and companies won’t help borrowing capacity unless, perhaps, you have others that can assist with guarantees. And deriving most of your money from PAYE is not really relevant when considering whether to set up a trust/
Foreign income – are you saying you want to make up an income – this would be fraud, offence of obtaining a financial advantage by deception, up to 5 years imprisonment but you would also need to declare any foreign income and pay tax on it.
Buying and trying to sell before settlement is extremely dangerous and you could lose out badly.
Higher rents will help servicing.
I was thinking that if i can demonstrate to the bank that i can mange the cashflow and debt very well. will they think me as a safe person to do business with ? is this the right way of thinking ?
= No, this would not make much difference as you have to fit their policies.The only way to increase borrowing capacity really is to get more income and/or decrease debt.
But you should consider whether you have really maxed out as each lender has a different policy and works out capacity differently.
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
All residential property purchased in your own personal name comes under the NCCP legislation so evidence of income to service the loan is a requirement on every case.
That is not to say every lender uses the same serviceability model and adopts the same assessment criteria.
You would be amazed the difference between the most generous lender and the most conservative.
I built up a portfolio of 40 unencumbered properties over a period of 12 years and whilst some of the principals may have changed the basics have not.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
thanks TerryW and Richard for your response. It gives me some confidence and lots of clarity. I had a thought about this after reading your replies. I think i need to focus on reaching the goals in 2015 and squeeze for 2016 ( i figured if i really tried hard enough, i probably still can get my goal set for 2016 reached, but i m not sure about 2017 to be honest). so i suppose if you cant borrow more after tried everywhere, you cant. it’s a sign to say ‘have a rest for now’. then you just need to keep your head down and keep paying down your debt and wait a bit..
You really need to stop thinking about equity and capital growth properties until you get your cash flow sorted, that will get you back in the game.
If you have significant equity in a property then perhaps consider selling it and getting something that’s Very positively geared, think granny flats or U.S. property or even commercial property. Yields from 8% upwards will soon bring your income to a level that the banks favour.hi Lauriek,
thanks for your reply. I m afraid i have to disagree with you here.
Cash flow is like your blood, while Captital growth is your muscle . you will die without blood straight away, but it’s the muscle that makes you stronger and grow bigger. I had enough of the education on those things ,among all the endless debate between the two, i found this is a very good and best simple way to describe it.
the game of the property is to increase your asset base using leverage in a clever and safe way. However cash flow is attractive and important, you will notice that all the mega riches that started off with cashflow switch back to organic or manufactured capital growth one way or the other.
It’s true that you can not buy designer handbags with your balance sheet, it’s also true that you can not accumulate your wealth via the cashflow alone. It’s a delicate dance between the two, and how you go about achieve it largely differ from your own financial sitaution, risk profile etc. You cant cashflow to leverage the same way as you cant save to be rich… You need your asset to grow in order to buy your next one. While Cashflow gives you the lifestyle or free time whatever, it is the capital growth that accumulates your wealth and work for you day in day out compounding.. this is a very important thing to understand when it comes to investing in property.
a better way is to find capital growth properties in disguise, so you can add value and bring it to cash flow neutral or even positive in relatively shorter period of time.
Selling is a sure way to decrease your wealth fast, i have sell a few of my properties and each time I regret it.. if the property is purchased based on well calculated numbers and correct structure. You never need to sell them , it passed on your next generation with no tax complications whatsoever.
Your blood supply has stopped flowing and gangrene is setting in.
Futility is continuing to do the same thing and expecting a different result. Your system has led you to a brick wall yet you continue to defend it. Looks like your need to be right is damaging your ability to grow. So what’s the plan now, sit back and wait for all your negatively geared properties to slowly become positive ? How long will that take ?
“You can’t cashflow to leverage the same way as you can’t save to be rich” That’s got to be one of the dumbest things I’ve ever read. you obviously have no understanding of compounding if you think it only applies to capital growth. Compounding simply means that profits are reinvested, something that’s very easy to do with cash, with the added advantage of diversification and adaptation to different market forces that develop. A 10% ROI is the same whether it is derived from cashflow or capital growth, with the exception that cash is realised and can’t be taken away unlike the situation during the GFC when peoples equity disappeared overnight and they were underwater with their mortgages. Their only saving grace was non recourse loans which allowed them to just walk away. We rarely have that protection here, so how would you handle a “margin call” on your loans if the property bubble burst ?
It seems like your strategy is locked in the 1980’s, expecting property to double in price every 7-10 years, times are different now and a lot of the old rules no longer apply.Time to expand on some thinking there Coogee. Cashflow and increased income are the answers to increased serviceability. Robert Kiyosaki and Steve McKnight books will be a good start for learning about that perspective if you are open to learning about it.
1. I don’t have a cashflow problem. Never have. My IPs are self servicing taking the tax incentive into account. My prob is servicablity.. which if I want.. I can always go to CF method to enhance my serviceability down the track as I already build up my equity base over the years.
2. Compound does work the same way, just on different rates and different bases. Do the maths if you want a IP that gives you a net 4% rental yield on a 2% annual growth, Or you rather have a net -2% rental yield with 8% annual growth ?
3. Its funny that the debate among the CF and growth is almost as brutal as the debate between keynes vs hayek in the 1930s. sometimes it makes me laugh, there is not really a need to say which is better than others, they are different things and focus on different areas of a matter. And you absolutely need both of them in order to succeed in the game of real estate investing. Which one is more appropriate is largely depend on your own personal goals and start up financial point. They both have their good and bad sides.
4. I said there is nothing wrong with CF investing style,..It aims to give you a surplus cashflow which will enhance your income position or a lifestyle to replace your salary and buy you some time or pay your bills and food etc without working. But its just not going to help you accumulate your wealth faster enough compare to those growth assets , , that is why growth assets generally has a lower yield by nature. However we d like to have a free lunch or get something for nothing, unfortunately , this is rarely happens in this universe.
5. Don’t get me wrong. The cashflow is awesome, but you just need to be aware that the catch is your forego some of the capital growth in future in exchange for that cashflow now. Remember, your wealth is the net between your asset value and your debt. Assume if your asset is 1 mio, your debt is 1 mio ( assume you borrowed 100% ) , and the property didn’t growth much.. your net wealth is 0 . Yes, your CF will still be there. But it will acting more like a salary replacement rather than wealth creation tool.1. I don’t have a cashflow problem. Never have.
You must have a cashflow problem in the eyes of the banks, otherwise you would qualify for servicing.
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
okay, so what’s the best type of properties for good positive cashflow?
what are the statistics in term of cashflow for single homes, duplexes/multiplexes, apartment units, apartment buildings, retail shops/buildings, office buildings, industrial buildings, or vacant land?
please share your experience
I highly doubt there is unlimited finance on planet earth, else show me how
“You must have a cashflow problem in the eyes of the banks, otherwise you would qualify for servicing.”
yes.. i do have a CF problem to churn out more IP .. but not sercing the current exisitng IP , that is what I mean.the best strategy i think is to combine the growth with CF strategy in a timely order .. of cause, if you have more funds and more skill sets, you can move onto commercial and development projects which create huge capital in relatively shorter period of time. For me, I would rather stick to a thing or two that i m familiar with and keep repeating the same thing over and over.
if you observe Robert Kiyosaki and steve mcknight ,I found they went through very similar path.. which is acquiring Postiviely CF property from the begining when they dont have a lot of spare cash and capital, and gradually build up their base.. then almost always they need to make that swtich at some point to something more capital intensive investments by nature with or without immediate day 1 cashflow.
I think when starting out, you can do cashflow and acuqire as much as you can.. but once you got the cash and a little bit experience you need to focus on growth assets for the reason i explained to Lauriek above.
the theory itself is actual quite easy to understand, I found the hardest thing to be successful is to have that consistent drive and sheer determination and endless action to go out and achieve your goal. that’s why most people can not be that success, only a few stand out in the end. It takes a lot of energy and disipline to stay focus and constant in action regardless of the resistance you are facing. That is a lot to ask for an average person who has the day job and maybe children and a tight budget to start with. Also, You have to be extremely good with numbers. probably that’s why a lot of successful investors are accountant.
for Postive cash flow. you’d be looking at rural multis.
thanks coogee :)
why rural multis, besides positive cashflow?the bottleneck seems to be serviceability, that each IP has positive cashflow and the rate of appreciation be such that the new appraised value would have sufficient equity values to get the next IP. I have been researching lots of different strategies in IP, but seems that the lender’s eyes are on whether the loan can be service if the IP cashflow is flat or non-existence.
if anyone here has a software program which can help in selecting IP, please share :)
Hate to say Charlie that is proprietory information and something we charge a lot for.
We use in the Buyers Agency side of the business which my partner runs.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Richard,
let’s expand the industry, share the knowledge :)anyways, base on my research so far, why is it that buyer’s agents charge their purchasing customers a commission that is based on the sold price of the property? what is the incentive for the buyer’s agent to negotiate down the asking price for the property? please help me understand the rationale. thanks
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This reply was modified 9 years, 9 months ago by
CharlieX.
The good buyer’s agents I know charge a fixed fee for their services.
Kinnon Bell | Kinetic Funding
http://www.kineticfunding.com.au
Email Me | Phone MeMortgage & Personal Loan Broker based in Cairns and Melbourne but servicing clients Australia wide.
Exactly as Kinnon says.
We have always charged a fixed fee irrespective of the purchase price.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Same with all the buyers agents I know, fixed fee or tiered depending on the price range (a tad different finding a property in the 2.5mil range than a 300k property).
Corey Batt | Precision Funding
http://www.precisionfunding.com.au
Email Me | Phone MeInvestment Focused Finance Strategist - servicing Australia-wide
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This reply was modified 9 years, 9 months ago by
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