from my knowledge, most inexperienced people who buy an investment property, by only one, maximum two, because they are negatively geared and cant afford another. But what if you can buy positively geared properties but the bank starts to think you cant afford it?
I’m looking at buying a positive cash flow positive property, because as my Serviceability test with the bank is getting tight. I rang the bank today and talked with them about future property purchases. They said that with my wage and my wife as full time ,we can borrow 450k, and the rent they consider is market value which is 4% (and taking the 80%) unless there is a current tenant in place with a lease contract. In the event that my wife stops working i can’t borrow anything, and with her working part time earing about 30,000 half of what she is earning now, i can borrow about 170k.
This is what i want to achieve, the ability to not be able to stop borrowing. My LVR is not the issue, but the serviceability. that is why i thought that buying 10%+ cash flow positive properties would be the answer. but I’m not sure. Do i have to buy cash flow + properties that can replace my wife’s wage, if that is possible.
Part of the problem lies with my current properties portfolio perhaps. I’m owning 300k on my PPOR, 440k on investment 1, returning $420 a week rent (this produces good capital growth), and 2nd investment property loan will be 295k and rent about $250 a week. I’m happy to sell the 2nd investment if it helps with things, but not the big one as i have a soft spot for it , as i might be building my home on the block in the future. I also have over 100k in cash set aside for purchasing/emergencies.
So any thoughts. There is an option to buy an off the plan unit, one issue i have with that is that it settles in a year time (or more) this will hinder the constant buying that i could do , while my wife and I are both working, buying properties with a short settlement, and moving onto the next one, just like your example Nathan Birch set of Sarah in his post:
http://binvested.com.au/how-to-build-a-10-property-portfolio-in-3-5-years-realistically-on-50000pa/
any advice will be appreciated.
shoooshooYou saw the bank or a broker? That will impact what you can do sometimes. Also some banks only recognize the states median rent, not on a regional basis (reality). Also some areasbthe bank consider “riskier” just make sure you don’t buy in an area like that. Again each bank may have different criteria for what they are comfortable with.
Just cos the bank says you can’t afford serviceability doesn’t mean it’s true….only you know if you are struggling financially.
Don’t let a bank’s decision decide what and how you can buy….Simple way of increasing serviceability without changing jobs/ increase income.
Top 5:
1. Reduce credit card limits ( and another debt)
2. Shop around for lenders that takes in negative gearing as part of serviceability ( not all bank does…)
3. don’t stick with one bank- most banks have a ” serviceability wall” meaning once you reach $700,000 in borrowing capacity the serviceability increase slightly ( reduce their risk)
4. Refinance back to 30 years- I/o
5. There are lenders that will service your loan on the 5 years fixed rate…rather then the “current SVR + 2%= 9%”There are many more ways to improve serviceability- those are my top 5.
I seen ppl who has been told by 2 banks there serviceability is $0….but when i applied to the SAME lender with a bit of change they pre-approved the loan at $170,000 — another smaller lender that allowed negative gearing ( and had lower living expenses) which is what the client end up going to had final approved at $215,000!!
Regards
MichaelMick C | Shape Home Loans
http://www.shapehomeloans.com.au/
Email Me | Phone MeSame Banks. Better Rates. Served With a Passion.
hi Josh, thanks for your comments. I saw both my third party broker and bank manager.
interesting, thanks guys. Michael your number 5 point: …rather then the "current SVR + 2%= 9%"… SVR is that the servicecibility + 2% interest rate rise?
Hi Guys,
This is such a common issue at the moment. I work full time and my wife owns a small bussiness as well. We dont have much debt but banks have tighten up 100% i think some times its a good thing.
If the banks are ledning money ask why? and then fix it….
Good luck
Jpcashflow | JP Financial Group
http://www.jpfinancialgroup.com.au
Email Me | Phone MeYour first port of call in finance :)
With loans … its a market and you gotta remember that.
Someone offers .. and someone accepts. People tend to think the banks are the only people offering money.
A couple of my recent deals are boring on paper but exciting in fact. I went around the student units in melbourne (you know the 'unsaleable' ones) and just ticked the ones who now say VENDOR FINANCE. And i went around creating a series of deals gearing these places at close enough to 8%.
It means my responsibility now lies in servicing the loan with the VENDOR and not the bank. It means i'm getting approvals. And it means the loans are geared on OPM. And thats how you make money.
Will the properties be hard to sell in the future? Yes .. but not impossible. Will they increase in price? WHO CARES. I'm almost guaranteed that the income from them will increase over a number of years .. and that will validate my deal.
Once the banks say no .. you have a stack of other possible options. Think creative .. and negotiate. Often if you have the capability to make a property work and the vendor cant .. he'll allow work to be done pre-settlement. If you have equity to 50% there are solicitor's funds.
Dont just write out a deal on paper and discount it because the banks say no. In my early years of investing I kept getting knocked back because my income was considered 'too low'. The fact that my rentals were enormous and geared to a point that created a small income on paper .. well .. the banks really couldnt care less. They were looking for their 'facts'. And I was looking to minimise on taxable income.
Work the deal. Think the deal. Write up your options on paper BEFORE you approach a bank.
And dont rely on luck. Rely on creating your own luck.
xdrew wrote:With loans … its a market and you gotta remember that.Someone offers .. and someone accepts. People tend to think the banks are the only people offering money.
A couple of my recent deals are boring on paper but exciting in fact. I went around the student units in melbourne (you know the 'unsaleable' ones) and just ticked the ones who now say VENDOR FINANCE. And i went around creating a series of deals gearing these places at close enough to 8%.
It means my responsibility now lies in servicing the loan with the VENDOR and not the bank. It means i'm getting approvals. And it means the loans are geared on OPM. And thats how you make money.
Will the properties be hard to sell in the future? Yes .. but not impossible. Will they increase in price? WHO CARES. I'm almost guaranteed that the income from them will increase over a number of years .. and that will validate my deal.
Once the banks say no .. you have a stack of other possible options. Think creative .. and negotiate. Often if you have the capability to make a property work and the vendor cant .. he'll allow work to be done pre-settlement. If you have equity to 50% there are solicitor's funds.
Dont just write out a deal on paper and discount it because the banks say no. In my early years of investing I kept getting knocked back because my income was considered 'too low'. The fact that my rentals were enormous and geared to a point that created a small income on paper .. well .. the banks really couldnt care less. They were looking for their 'facts'. And I was looking to minimise on taxable income.
Work the deal. Think the deal. Write up your options on paper BEFORE you approach a bank.
And dont rely on luck. Rely on creating your own luck.
Hi Xdrew are you based in Melbourne???
You have some great post.Cheers
JohannJpcashflow | JP Financial Group
http://www.jpfinancialgroup.com.au
Email Me | Phone MeYour first port of call in finance :)
shoooshoo wrote:hi Josh, thanks for your comments. I saw both my third party broker and bank manager.interesting, thanks guys. Michael your number 5 point: …rather then the "current SVR + 2%= 9%"… SVR is that the servicecibility + 2% interest rate rise?
The way the bank see if you can afford the loan is to calculable it based on SVR ( Standard variable rate, without any discount) + 1.5- 2%.( depending on lender)
The normal SVR is around 7.8
Regards
MichaelMick C | Shape Home Loans
http://www.shapehomeloans.com.au/
Email Me | Phone MeSame Banks. Better Rates. Served With a Passion.
Hi shoooshoo
I'm with xdrew, i.e. think outside the box. In the last two weeks we've had 9 people ask us for help selling their properties with Vendor Finance. With traditional sales in a lot of areas moving at a snails pace right now, it's become much easier to get properties on vendor finance.
Also, regarding your second property, if it were me, I'd consider selling it with vendor finance. Doing this would allow me to fix my capital gain on the property and generate good positive monthly cash flow. Thereby improving the income side of my assets & liabilities.
Cheers, Paul
Paul Dobson | Vendor Finance Institute
http://www.vendorfinanceinstitute.com.au
Email Me | Phone MeAn alternative way to finance your home.
Seriously guys, i have no idea what Xdrew or Paul are talking about. Vendors finance? i thought the bank only provides finance. Please provide clarifications, i will also research the matter. And thank you for your posts
The general gist is; the seller of the house loans you some or all of the money. They might choose to do this in order to secure a quick sale, or perhaps they don't "need" all the money right away. For example: an elderly person might need to sell their home in order to buy a place in the nursing home… but the nursing home spot costs less than what their house is worth. So they might loan you some of the money to buy their home, and you pay them interest that is higher than what they could get in a savings or term deposit account. Win win situation for everyone involved.
Jacqui Middleton | Middleton Buyers Advocates
http://www.middletonbuyersadvocates.com.au
Email Me | Phone MeVIC Buyers' Agents for investors, home buyers & SMSFs.
shoooshoo wrote:Seriously guys, i have no idea what Xdrew or Paul are talking about. Vendors finance? i thought the bank only provides finance. Please provide clarifications, i will also research the matter. And thank you for your postsThats what the banks want you to think. That the banks can be the sole suppliers of housing finance for your requirements.
However they are just the top of the lending pyramid.
In any non-specific order .. here are a couple of options you've probably never thought of .. yet these options exist.
Bank Lenders
Non-Bank Lenders (at the moment most of these are really backend Banks)
Equity Based Lenders
Vendor Financed Loans (the owner supplies finance)
Solicitors Funds
Groupshare (Property Trust)
Family Member OR Family Member signatory (be careful this means THEY guarantee your deal)
Profitshare (Vendor financed Owner developed)
Rendered profit deals – no vendor finance .. no liability .. you get a better price for his property and split the profits.There is more than one way to make a deal.
xdrew wrote:shoooshoo wrote:Seriously guys, i have no idea what Xdrew or Paul are talking about. Vendors finance? i thought the bank only provides finance. Please provide clarifications, i will also research the matter. And thank you for your postsThats what the banks want you to think. That the banks can be the sole suppliers of housing finance for your requirements.
However they are just the top of the lending pyramid.
In any non-specific order .. here are a couple of options you've probably never thought of .. yet these options exist.
Bank Lenders
Non-Bank Lenders (at the moment most of these are really backend Banks)
Equity Based Lenders
Vendor Financed Loans (the owner supplies finance)
Solicitors Funds
Groupshare (Property Trust)
Family Member OR Family Member signatory (be careful this means THEY guarantee your deal)
Profitshare (Vendor financed Owner developed)
Rendered profit deals – no vendor finance .. no liability .. you get a better price for his property and split the profits.There is more than one way to make a deal.
thanks Xdrew for the information. Ok, lets start from the start with your list, with the bank lenders,
these are obviously the big banks, smaller banks, what about credit unions, etc, are they safe?
Vendor finance is actually pretty simple when you do understand it. Instead of the bank lending you money you assume the loan with the buyer. This is perfectly legal and done everyday! It is even more common in America.
This post on creating cashflow with vendor finance covers the basics and may help you to get a better understand.
In regards to the lenders I have the follow tips.
1. Find lenders who take into account 80% of the full market rate for the rent. Not 80% of 4% rental yield. What if your rental yield is 10%?
2. Don't lock everything in with one lender
3. You may need to find lenders who offer a higher interest rate for the increased risk.
4 Over time get your properties REVALUED and get the rental income from them revalued also. Hopefully this will add to your serviceabilityRyan McLean
CashFlow Investorps. Another article that may help is how to buy more property.
Ryan McLean | On Property
http://onproperty.com.au
Email Meryan mclean wrote:1. Find lenders who take into account 80% of the full market rate for the rent. Not 80% of 4% rental yield. What if your rental yield is 10%?You can find lenders who will take into account 100% of rental income – providing the application meets certain criteria.
This is particularly good for investors who are approaching the old serviceability wall.
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
Hi shoooshoo
A few web resources that may help in your search for information about vendor finance are:
https://www.propertyinvesting.com/strategies/wraps
https://www.propertyinvesting.com/str…/lease-options
http://www.jvpropertypartners.com.au…d=50&Itemid=75
http://www.vendorfinancelawyer.com.au/
http://www.vendorfinance.asn.au/ The Vendor Finance Association of AustraliaHope that helps your research.
Cheers, Paul
Paul Dobson | Vendor Finance Institute
http://www.vendorfinanceinstitute.com.au
Email Me | Phone MeAn alternative way to finance your home.
thanks guys you are champions. I have started reading Ryan Mclean's links, so much to read, i'm going to try to get through it, my brain has been a vacum for information lately.
ryan mclean wrote:Vendor finance is actually pretty simple when you do understand it. Instead of the bank lending you money you assume the loan with the buyer. This is perfectly legal and done everyday! It is even more common in America.This post on creating cashflow with vendor finance covers the basics and may help you to get a better understand.
In regards to the lenders I have the follow tips.
1. Find lenders who take into account 80% of the full market rate for the rent. Not 80% of 4% rental yield. What if your rental yield is 10%?
2. Don't lock everything in with one lender
3. You may need to find lenders who offer a higher interest rate for the increased risk.
4 Over time get your properties REVALUED and get the rental income from them revalued also. Hopefully this will add to your serviceabilityRyan McLean
CashFlow Investorps. Another article that may help is how to buy more property.
hi Ryan
i’m reading now the link you posted on “cashflow owner finance”, and i dont understand why would any buyer would use vendor finance, if the interest rate is higher, and the purchase price is higher as well, etc, is it because they cant borrow from the bank for whatever reason that they need to use “vendor finance”. also what happens if the buyer defaults on the loan? so many questions..hahaa…i will keep reading
Hi shoooshoo
In most cases yes, people will buy with vendor finance (VF), knowing that they're paying a premium because they can't get a traditional home loan. It's been estimated that approximately 20% of the Aussie population can't get a traditional home loan and, in our experience, they're not too happy about being locked out of home ownership. A smaller percentage just don't like banks
The two most popular VF strategies are Lease/Options (Rent To Owns) and Instalment Contracts (IC). In both cases the Title of the property stays in the original owner's name until the VF buyer exercises the Option (in a Lease/Option) or pays out the loan in an IC. In either case, if the buyer defaults prior to exercising the Option or paying out the loan, the two sets of legal paperwork are terminated and the original buyer gets the property back.
This is a bit of a general overview of the default process but that's what we've ultimately experienced.
Cheers, Paul
Paul Dobson | Vendor Finance Institute
http://www.vendorfinanceinstitute.com.au
Email Me | Phone MeAn alternative way to finance your home.
hi Paul,
thanks for the info, i also read your website. The one thing that seems to be an issue, from what i read is that you can “run out of time” advertising your property to be vendor financed, and you have to carry the loan with the higher interest yourself. can you provide more clarification?
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