Investing in property is serious business. You’re taking on a sizeable commitment to the banks as you accumulate (ideally) quality assets and build your portfolio to attain financial freedom.
Life savings are generally involved, and for beginners, it’s likely you’ll also be putting your own home on the line to take that first step up the property ladder in earnest.
Naturally, the idea of taking on debt to create wealth can seem counterintuitive, and leave those starting out with more questions than answers when it comes to the best loan products for their needs.
But working out how you’ll use other people’s money to leverage into high growth housing assets doesn’t have to be a stressful proposition, particularly if you start with these five fundamentals…
- Your leverage
The beauty of property investment is that the right type of debt portfolio can actually assist to boost your income, because bricks and mortar is a commodity you can leverage.
You can leverage your own home – or the equity in it – to purchase an investment property. And then over time, as your home and asset grow in value and the latter provides reliable cashflow with which to manage your debt, you can leverage both properties to buy even more investments.
However, if you tie up your assets in messy financial structures, your leveraging power is jeopardized. To what degree depends on how complex the structure becomes.
The key is to maintain maximum flexibility when it comes to your equity store, by creating stand-alone mortgages that don’t see you giving the banks too much influence over multiple securities.
- Your strategy
Anything you do with regard to finance, tax and ownership structures should align with your long-term goals and investment strategy, with the aim being to arrive safely at your destination with minimum risk and maximum return.
If you plan to accumulate a portfolio of say, six plus properties over a seven-year term for instance, then you have to finance your very first investment accordingly.
Tying up all of your properties into a single loan product, or even dividing them across a couple of mortgages, means limiting your portfolio’s capacity to grow according to your mapped out journey.
- Your objectives
So you decide you want to actively grow your asset base by two properties in the first two years of your investment journey, and then use the growing equity in both to secure an additional four assets between years three and five.
Again, leveraging can make this possible, but only if you haven’t given your lender too much control over your investments.
- Your circumstances
Make sure you can maintain any finance structure you establish within your investment comfort zone, ensuring control of your portfolio at all times.
Lumping your properties together in the one financial basket gives the bank ultimate power over your property assets.
Should the worst-case scenario ever eventuate – the need to sacrifice an investment you can no longer afford – having your loans cross-collateralized means the lender can choose to sell any and all assets tied up within the loan.
On the other hand, if your properties are individually financed, you can choose which one to sacrifice in order to crystalize a loss on one of your investments, while still retaining your family home.
- Your bottom line
Sure you can work your way out of a less than desirable loan structure. But it comes at a price.
Consider fixed rate mortgages, which some investors favour for their ability to provide additional cashflow security. Should you choose to exit a fixed term early, you will be hit with considerable termination fees based on calculations around the gap between fixed and variable rate products on offer at the time.
The same applies to refinancing. To untie complicated loan structures, the banks will want to revalue your properties and charge you all sorts of exit fees and then establishment fees to set up your new structures.
Finance can be the property investor’s friend or foe. Get the structure right and you will reap the optimum rewards of your investment endeavours for many years to come, get it wrong and you stand to magnify your risk exposure significantly.
If you would like to know more about the best possible finance structure for your needs and investment objectives, why not connect with the experienced tem at Trilogy Funding?
We’ve helped thousands of investors grow a successful and sustainable asset base and we can help you too. Click here now to find out how.
About the Author
Since 2008, David Thomas has built a business aimed at servicing the needs of property investors, owner occupiers and small business owners. David is recognised as one of the top 10 independent mortgage brokerages in the country, David and his team have settled almost billions of dollars worth of residential and investment loans over the last decade.
Known for his straightforward, relatable style, David believes by educating people about property funding; they fare better in the market. By sharing his expertise openly, some of the people he educates will likely become his clients. It's a win-win approach.
David Thomas is a credit representative (Representative Number 506153) of BLSSA Pty Ltd, ACN 117 651 760 (Australian Credit Licence 391237).