Podcast: Strategies To Supercharge Your Property Portfolio | Ep. 221

Posted by Ed McKnight on 23/04/20
Strategies To Supercharge Your Property Portfolio 001
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Show Notes

What's Covered in the Show?

In this episode, we discuss how you can go from 2 properties to 5 properties and beyond. At some point, many investors hit a wall and the bank stops lending to them. No lending = no new investment properties.

But, unless you understand why the bank isn't lending you more money, it's very hard to fix it. Worst of all if you keep applying for lending and get denied your credit record will continue to disintegrate – making it harder for you to get lending in the future.

Here, we cover off how to increase both your servicing and your equity position so that you can supercharge your property portfolio.

We also mention our upcoming property investment webinar, where we will teach you how to run the numbers on an investment property. It's completely free and is happening this Tuesday 21st April, you can sign up and register here.


Transcript of the Podcast

Ed McKnight: Hello and welcome along to the Property Academy podcast. I'm your host Ed McKnight, and I'm Andrew Nicol, and today on the show we're talking about how do you supercharge your investment property portfolio? How do you take it to the next level?

Now, we've been running a survey, I think I've mentioned it a couple of times on the show over the last couple of weeks during the Covid19 shutdown. And one of the questions we've been asking to people is, what do you want to learn more about? And there are a lot of investors out there who say, look, Ed, you talk a lot about first time investors, but I've got two, three, four properties, however many. And I want to get more, but the banks stopped lending to me. I'm finding it really tough to get more money to go out and buy another house, even though I really want to.

And typically it comes down to two things that people are saying in that survey, they either say, look, I'm light on equity now. I don't have enough deposit to go and get the next property, or I don't have servicing. I don't have the income to be able to pass the banks calculations, even if I think I could actually afford it in real terms, it's just that I can't pass the banks calculation.

So we're going to go through both of these today, and I'm sure this will be an ongoing topic now that we know there are so many people out there interested in it, about well, how do you actually go about creating that extra equity or getting that extra servicing so that you can borrow and purchase and build your property portfolio.

So let's go through this. Firstly, on the equity side, one of the things that we see reasonably often is investors with lots of their lending with the same bank. Now this can restrict you from an equity perspective, and the way to solve that is by separating your mortgages out so that they're with different banks.

Now, Andrew, talk us through how this works because you use this a lot.

Andrew Nicol: Yeah. So one of the advantages of buying new in the current climate is that you need less deposit to buy that property. But the day that a property settles, it's considered old from the bank.

So this is a really important consideration, if you're looking at split bank or whether or not to do it all with one bank. So take an example of someone that has maybe 200,000 worth of usable equity to buy a rental property. Now if they're going to go and buy a new property for 500,000 they're going to need to have a 20% deposit, so $100,000 so there still going to have a hundred thousand left in usable equity. That's the theory, however, if they do it with their bank, the day that it settles, the cross security rules mean that when they go to borrow again, they new rental property is considered old, even if it's a day old, and therefore it chews up another $50,000 worth of usable equity, that day.

So it's really important to separate those out. And again, you can still restructure things if you've already structured it with one bank, you can still move your investment lending to another bank under the dollar for dollar refinance rules. So the banks are still allowing you to move 80% of your loan to another bank and separate that out from your owner occupier property to free up that usable equity.

Now, just, you hate to be very careful here because, the dollar for dollar rule has some criteria and some caveats around it. One of them as that you're not using the exemptions to kind of trick your position, which is kind of what would be considered here. So you need to kind of think about this long term and probably if you are splitting off your banks, you could expect the bank to maybe ask whether or not you're intending to buy another rental property the answer to that hopefully would be no, because you're not doing that at this stage.

You're just separating out your assets for protection and then that frees up that usable equity. So don't have your eggs in one basket. It will be a major disadvantage to you if you want to keep it usable equity available. And if you've got them all with one bank, now stop spreading things out now before you go and buy a new property.

Ed McKnight: Fantastic. Now of course, tip number two is you can save and build up a cash deposit or pay down debt. Now we talked about how you might do this, for your owner occupier home, or you could actually use it for an investment property as well in the previous episode.

So we won't go too far into that, but you could save up a cash deposit, pay down some of your debt, and that would create equity for you as well. Now tip number three is to restructure your portfolio. So you may have properties within your portfolio that the bank doesn't consider that it has as much equity within this or won't lend as much against this, I should say.

So it's got in effect, a lower LVR requirement. Now these are typically apartments or Andrew, what other sorts of properties might the bank not lend as much against.

Andrew Nicol: Yeah. So one important consideration is how much will your bank lend on a particular type of asset. Now, depending on the size of the apartment, might depend the maximum LVR that a bank will lend against it. So, and those rules changed from time to time.

So for example, one bank might lead you 80% or 70% if it's an existing rental for a say 50 square metre apartment, whereas another bank might require it to be 55 square metres, or else they'll only lend 50% or a lesser amount. And so it's really important to see that your bank gives you the maximum loan to value ratio on your asset type.

Other examples might be hotel, or managed rentals. So, for example, sometimes banks will be a lot stricter and only lend, say 50% if you've got an apartment within the Heritage Hotel. So there's a lot of those kind of investments still floating around. If you've got one of those, you maybe want to split that out to the bank that lends you the most on that and, or in some cases, get rid of it, which I think flows into Ed's next one, some investment types require so much usable equity, sometimes things I bare land do that, you might only be able to lend 50% on bare land if you haven't got the intention and the ability to build on that anytime soon, and so sometimes getting rid of it to expand your portfolio is the right thing to do.

And I've seen plenty of instances where people have these, investments in their portfolio which aren't really that great and they haven't gone up in value, and they're a bit loathe to get rid of it cause they're hoping it goes up in value.

The time that it takes you for it to go up in value is probably going to limit you in terms of getting into the market now on some good deals, my advice is always to get rid of those or at the very least as Ed says, structure it with another bank and put the usable equity in the good solid and investments.

Ed McKnight: And that moves on to our next tip as well, which comes more over to the servicing side, but it's still restructuring your portfolio. If you've got a property that takes up a lot of cash investment, so if it's so negatively geared and you're putting a lot of money into this property that it's taking up income that you could put into other properties.

So if you got rid of that one that's costing you a lot, you could potentially go and buy two properties. So you sell one in order to buy two. Andrew, talk us through some of the details of when this situation might occur.

Andrew Nicol: Yeah. So I actually just spoke with a client this week who due to a sort of an unusual arrangement, they've ended up with a rental property, which is with quite a lot of money. $800,000, but they're only getting a small amount of rent for it. Now, in this instance there's a relationship situation and so that's why they've done it. And they're not going to be in a position to sell that anytime soon.

But had that been a normal situation for a client where they were getting a really poor return on investment. My advice might have been to get rid of that so that then they can go out and buy something that's not such a drag in cashflow.

So they're able to expand your portfolio. And I've seen instances where people only had to sell one property to buy another five just because they've got such a cashflow drain on one property and by the time the bank discounts the rent by 25% and increases the interest rate to the test interest rate it holds them back so much and takes a great deal of income from their personal income, to be able to make that service on the banks calculations.

Ed McKnight: And similarly, that could be if you've tuned your own home into a rental property. So say you're an expat listening to this, working away in Singapore or Hong Kong or something like that, and you might've had a really nice property that you lived in, you bought, you loved living in it, but then you've gone overseas.

Now if you've got a tenant in there, if it is a really nice property, it's probably got a very poor yield on it and in which case that would be the situation where from the banks servicing calculations, it looks like it's a big drain on your cash flow. So if you were able to get rid of a property like that, you may be improve your serviceability in order to buy more.

Now, there are a couple of other things as well that you could do. In a normal market, you might look to get a higher paid job, or if one partner is currently on leave, perhaps from paternity or maternity leave. If you go back to work, you're able to get more income, if you can improve your personal financial position, that's obviously going to make serviceability a lot easier.

But the other one as well, is debt consolidation. We talk about this a little bit, but the main reason I'm thinking about this at the moment is not necessarily the Gem credit cards or a higher purchase or other credit cards. I'm more thinking about if you've borrowed for a car payment. So you've got a car on finance, and you might be paying 11% against that if you consolidate that debt against your property portfolio, then you'll have a lower payment.

You might go from 11% to three and a half or 4% that's going to decrease from the bank size, the payment that you need to make or the minimum payment you need to make against that, and that's going to make your serviceability a bit easier. But obviously the other thing, Andrew and I want to talk to you about this is getting high yield properties in your portfolio, so that improves your serviceability.

Andrew Nicol: Yeah, definitely. So certainly with ring fencing coming into effect, people are bit more aware of what the portfolio is costing them on a annual basis. And so often where our model might be how it might differ now from previously as to add in a few more yield properties which yes you sacrifice growth on that generally speaking, but if you do have a higher yielding property in your portfolio, then that's going to improve your overall position in the bank size.

So it might be that you get a couple of properties, they say you had a couple of investment properties in Auckland, and they might be costing you a bit of money, let's try and find something now that might be, say a Wellington apartment that might generate a good cash flow income that you can use to offset the cost of your other investments in Auckland.

And then you might be able to expand your portfolio again, and that's really useful because you can kind of reset the clock a little bit by having one offset the other and then all of a sudden you are not needing to make as many top ups and so therefore the bank sees your income is available to service more investment debt as time goes on.

And actually just one thing I wanted to mention, there Ed would be with the consumer debt, remember that yes if you add your car loan onto your mortgage for example, you might also stretch out the payments for 30 years and whilst you don't want to paying off a car loan over thirty years what you're actually doing is you're increasing your overall payments to your personal mortgage so you'd be in a better position anyway, but also it brings that coupled with a lower interest rate can bring down your repayments drastically to allow you to buy more investments.

And as long as you know the outcome is more significant than, you know, adding the car loan onto the mortgage even some of those interest free loans that people get caught up getting a few of them, if you can reduce those payments from $50 a week down to $3 a week, that has a major impact on your ability to service any future investments. And the same goes for credit cards.

Even if you pay your credit card off in full every month, the bank still takes the limits into account. So if you don't need a 50 grand limit, maybe reduce it to ten, reduce it to five or get rid of it all together if you don't need it and buying another investment is more important, let's look at getting rid of those now buying some investments and just using a debit plus Visa or something like that.

Ed McKnight: Fantastic. Well, let's wrap it up there, but please don't forget to rate, review and subscribe to the podcast. It really does help us get the message out to more people, of course, because this sort of topic has been so popular we will be talking about it more in the future and hey if you want to be able to run some more numbers and see where your position is.

Why not come along to our webinar, which is this Tuesday, 21st of April at 7:00 PM where Andrew's going to be exposing his spreadsheets and showing you how to run the numbers on an investment property. I'm going to drop a link to that in the show notes, so tap or swipe over that cover art it'll take you right there or just head along to the Opes website Opespartners.co.nz you can sign up there.

Thanks for listening to the Property Academy podcast. I'm your host, Ed McKnight, and I'm Andrew Nicol, and we're going to be back again tomorrow with even all daily strategies, tactics, and insights to help you get the most out of the New Zealand property market.

Until next time.