Too often I see property portfolio‘s with finance structures, which on the surface look fantastic, but when you dig down a little, are a complicated mess. The mess usually originates from properties being cross collateralised. Cross collateralised means that one loan is secured by at least two properties.
How a mess is created
It usually starts when you own your own home and you are looking to borrow for your first investment property. Often you will have been to see the lender where your home loan is and they will advise if you can afford to buy a 2nd property. When you purchase the 2nd property, you have one loan for your own home and one for your investment property. It feels simple. 2 loans 2 properties. The problem with this situation is that both loans will be secured against both your properties and this is where the mess starts. As you add further properties to your property portfolio the tangle becomes more complex and therefore each time you attempt to add to your property portfolio the task becomes bigger and bigger, as more valuations have to be ordered. The costs can add up too.
Selling a property can be equally problematic, especially if the value of a property within your property portfolio has fallen in value. Such a situation may result in you being unable to release the property or having to repay a higher amount to the bank than you expected from the proceeds of the sale.
There is another way. There is a simple structure that you can put in place and the benefits to you, the investor, are enormous. A simple finance structure for your property portfolio will provide you with more flexibility to buy and sell, require fewer valuations, give you more control and save you money.
Simple Finance Structure:
So what does a simple structure look like. Lets take a look at a common example.
Property 1: This your owner occupied house. Since you purchased this property the property has increased in value. You have also paid down some of your home loan and as a result you have equity (equity is the difference between the properties value and what you owe) in your property which you wish to utilise to purchase another property. To put a simple structure in place you would apply to the bank for a loan to pay the deposit and costs associated with the purchase of property 2 – the property you are looking to purchase. This would result in you now having two loans secured against your owner occupied home. Loan 1: Is your remaining owner occupied debt Loan 2: Is the deposit for your investment property.
Property 2: Before you find property two you would apply either to your existing lender or another lender for the balance of the purchase price. This loan would then only be secured against property 2.
So your portfolio looks like this:
Property 1 Loans:
1. Owner occupied loan
2. Investment property deposit
Property 2 Loan:
1. Investment property loan
Whether you have multiple properties already or you are about to buy your first investment property this structure can be put in place for you. This long term structure will help you grow your portfolio now and when it comes time to sell a property either now or in the future, will still serve you well.
If you would like to discuss your lending structure please feel free to get in touch with me, Margaret Godfrey, Mortgage Broker Newcastle for a no obligation free chat by either calling me on 0451 471 061 or emailing me at email@example.com