I am about to embark on another IP purchase which will take my bank debt to about $700k. Sure my rents cover my loans, but I still worry at night wotif the tenants leave etc. Does anyone share the same concerns or should I just continue to forge ahead and forget about the debt and just look at the debt ratio.
Hi,
If you are concerned about your debt level, maybe you should cool it for a while, until you gain confidence that most of your properties are tenanted most of the time.
Have you established a “float” to cover payments when properties are vacant? Perhaps, you just need to work out a strategy of how you will manage.
I lend a lot of money to a lot of people all the time. However, I never recommend anyone borrow, if they are not comfortable with their debt level.
How much of your debt is “good debt” ie for positively geared investments, and how much debt is consumer debt ie personal loans, cars or other liabilities that don’t generate a +ve cash flow? Maybe this is where you are feeling nervous…
Gary Young
Home Loan Connexion
Mobile 0407 64 66 32
Fax +61 7 4636 4841All good debt, no car loans and I pay my credit cards monthly. I guess my wotif worries stem from the fact that my debt service levels have now exceeded my employment income (rental income not counted), which in the past I have used as a fall back if things go pear shape. I have reserve funds if I need them I guess I just don’t like owing so much money, which is envitable in the IP game. Surely I am not the only one with these concerns.
take out landlords insurance. it can cover about 6 weeks if your tenant leaves and also covers willfull damage up to a certain amount 30K to 50K
All good debt, no car loans and I pay my credit cards monthly. I guess my wotif worries stem from the fact that my debt service levels have now exceeded my employment income (rental income not counted), which in the past I have used as a fall back if things go pear shape. I have reserve funds if I need them I guess I just don’t like owing so much money, which is envitable in the IP game. Surely I am not the only one with these concerns.Ok, all sounds good. So as advised elsewhere, look at Landlords insurance (but this only pays if professionally managed by a registered property manager).
So, consider these questions;
Are you confident your property manager will keep the property tenanted? If not, find another manager.
What is the vacancy rate in the suburb/city your properties are located in. Where I live in Toowoomba vacancy rates are 1%, Dalby is 5%. How does your town compare?
What has been the vacancy rate for your properties? Can you budget a “float” to cover the weeks vacant?
Is your rent above market? Perhaps this is a factor if your vacancy rate is above the norm (if this is indeed the case).
What can you do to attract longer term tenancy?
As a mortgage broker, I would be asking you to consider all of the above things, as you have now become “rent dependent”. Some banks do not like this. I would imagine that if you achieve enough positive cash flow from other IP’s, they may be able to carry one vacant IP for a little while. That’s why I always recommend never exceeding 80% LVR where possible.
I look forward to hearing more thoughts from you.
Gary Young
Home Loan Connexion
Mobile 0407 64 66 32
Fax +61 7 4636 4841Regarding being nervous re debt, I share your concern. This has at times held me back and put me into “standing still” mode”. Not a good mode to be in.
Can I suggest that you do up a Risk Management Register. I do not hear much about these types of Registers at any forum, seminar etc that I have been too. Basically the Risk Register is as important to me as my long range strategy as it allows me mitigation/knowledge what to do if the sky begins to fall.
To do one look at your fear/s —-write them down and then research until you find the answers. Very powerful. As you have written it down it gives you a sense of power to be able to handle the problems.
Having been in your shoes these are my thoughts to assist you, I know the strategy has helped me in the past. Ring me on 0419173396 if you have any questions if this is new idea to you. You may able be doing this but are still nervous.
Cheers
CaddyHi Beachboy,
Debt can be scarey if you haven’t taken proper precautions.
Perhaps you could take out or increase your life insurance policy to cover the amount of debt.
We did this, so that if one of us dies, we could pay out all loans easily (if necessary), without causing the other to sell, sell, sell at a time of crisis.
Perhaps have some loans at fixed interest rates, some loans over 3, 5 and 1 yr terms. Have some variable, etc. etc. Also, all of our loans AT THE MOMENT are P & I – to reduce.
The bottom line is – if you don’t feel comfortable with debt, don’t have a high LVR.
Good luck,
Del [
]Thanks for the advise everyone. Caddy 222, I like your idea of a risk management ledger. Although I do not have a formal blue print, I do have planned exits/solutions.
Fortunately touch wood, I have had no vacancies in the past 12 months. My properties are slightly different to the norm in that I have purchased them to subdivide and in part develop which will release the true value of the property. I have experience in this area and I am confident of the outcome.
Home Loan Guy you made a comment about being rent dependent and how some banks look at that. Surely most IP investors once they get beyond $500 K to 1 million in debt are rent dependent. My understanding of most IP investors today is that they are in debt to their eyeballs although they may have a good LVR. You also mentioned not exceeding 80% LVR, do you mean 80% across the board, ie my whole portfolio including my own home used a security or each individual IP?
Thanks again for the comments.
Home Loan Guy you made a comment about being rent dependent and how some banks look at that. Surely most IP investors once they get beyond $500 K to 1 million in debt are rent dependent. My understanding of most IP investors today is that they are in debt to their eyeballs although they may have a good LVR. You also mentioned not exceeding 80% LVR, do you mean 80% across the board, ie my whole portfolio including my own home used a security or each individual IP?Thanks again for the comments.
Hi Beachboy,
Yes, most investors do become rent dependent, and this is why Lender’s Mortgage Insurance can become a problem with some institutions. For my clients, I split their portfolio over several institutions, to reduce the perceived risk (by LMI and banks). For instance, GE LMI (one of the largest mortgage insurers in the country) used to have a maximum risk of $750,000 per client, but have recently increased that amount (due to increasing market).I recommend splitting the portfolio amongst different lenders (don’t keep all of your eggs in one basket). As I’ve mentioned it here, I think I’ll create a new topic tonight on portfolio finance managment and see where it leads.
Back to your question. Should your portfolio remain below 80% LVR? If at all possible yes…makes subsequent lending easier to obtain, and you only need to meet bank policy not LMI policy. Believe it or not banks are more lenient on rent dependency than Mortgage Insurers. Second reason, your portfolio is likely to be cash flow positive. Third reason, LMI is very expensive, and is on a sliding scale from 80% LVR up to 95%. This extra settlement cost can be as high as 2% of borrowed funds ($2,170 on borrowings of $100K on unregulated/investment contracts. This expense can often make a positive geared property become a neutral/negatively geared property.
Lender’s Mortgage Insurance is a premium/fee you pay to protect the lending institution!!!. LMI never protects you!!!
There’s lots more to say on this subject, but I’d like to hear your comments at this point.
Gary Young
Home Loan Connexion
Mobile 0407 64 66 32
Fax +61 7 4636 4841
email [email protected]
Hi beachboy
I wish my good debt level was only $700K i passed that mark about 3 years ago. I now have someone fully employed to monitor and maintain that all receipts are received on time. As the guys say just be diligent in your recording and ensure that all debts are paid on time. Don’t ever listen to excuses made by the tenant / wrappee as this is a business to you and I. Balance your portfolio with a combination of fixed and variable rates. We hedge on the future markets to reduce risk but at $700K the costs wouldn’t be worth it.
Think positive and wait for the month when they are all repaid.Cheers Richard
[email protected]There is no such thing as a problem.
Just a solution waiting to be foundRichard Taylor | Australia's leading private lender
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