Podcast: When You Can Sell 1 Property to Buy 2 Properties | Ep. 256

Posted by Ed McKnight on 26/05/20
When You Can Sell 1 Property to Buy 2 Properties 001
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Show Notes

What's Covered in the Show?

In this episode, we discuss when you can sell 1 property to buy 2 properties. Banks have internal LVRs that restrict how much they are willing to lend against certain types of properties.

Holding these asset types takes up a lot of equity in an investors portfolio, which means that in some cases an investor can sell one property in order to buy two more. These are often niche investments, such as bare land, hotel units and small apartments.

We also mention that you have the option of taking our property investor quiz. In just 7 questions, this quiz will give you a 'yes', 'no', or 'maybe' answer about whether you are in the position to invest in property as a first time investor.


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 internal LVRs at banks. And this is really, really important because you might think, great.

The Reserve Bank has taken away loan to value ratio restrictions. I'm going to go out and buy a whole heap of investment properties with a 20% deposit.

That's going to be really great. But here's the thing. Banks aren't necessarily going to lend at that level and with some specific properties, some specific property types, which we're going to get into, the banks will not lend anywhere near 80% on them, no matter what the loan to value ratio restrictions are from the reserve bank.

And it's really important to recognise that a lot of what Adrian Orr is out there doing, jawboning and talking to banks and removing loan to value ratio restrictions and delaying capital requirements, it's all to try and make the banks not conservative, but just because you do take away the rules, doesn't mean that the banks are going to start changing what they do.

And so we're going to talk about specifically about niche properties and how in some situations, if you own a specific property, you might be able to sell one property to buy two properties. Andrew's going to walk that through, but with us in a moment.

But what's the reason why, and this is really important is that you've got to start tracking your return that you're getting on equity. So when I talk to a lot of property investors, everybody's worried about cash flow. Is my property going to be cash flow positive? Is it going to be negatively geared or positively geared?

Here's the thing for most people, whether your property is up $10 a week or down $20 a week, if it's marginal, it's not going to make a difference to your life, but where you're tapped out, the thing holding you back from growing your portfolio is not the cash flow on it, but how much equity you've got, and that's why you've got to make sure that you're investing in properties that can be leveraged, that you can get bank lending on because that's when you're going to be able to get a significant enough of a portfolio size in terms of portfolio value to be able to grow it and achieve your financial goals.

That's why you don't want to invest in some of the properties that we're going to talk about in a moment or property types we're going to talk about at the moment because they are restricted in terms of banks internal LVRs , there not going to lend a lot of money on them. And that's going to restrict you in terms of the portfolio you can grow and your future growth. So Andrew, how is it that in some circumstances you're able to sell one property in order to buy two? Walk us through an example.

Andrew Nicol: Okay, so let's talk about the example of someone who owns a piece of land. Now lands one of those really challenging products to lend against because the bank wants to know what you're going to do with it. And if you're just land banking, they will only lend you 50%.

So if you, generally speaking, so if you're going to sit on it, you're not going to build on it right now, the LVR, the maximum LVR is 50%. So if the land's worth 400,000 then you're, and you've got $200,000 worth of lending against it, then you've got all of that you've got no usable equity.

So you've got 200,000 worth of equally tied up that you can't do anything with. Now, if you're sitting on that and you're not able to build on that, but particularly because, okay, let's remember that BNZ now have restricted their build policy to 65% LVR, 65% max LVR if you're going to do a construction build with BNZ as of today, then maybe it's time to get rid of that property.

So you sell the piece of land for 400 you take your $200,000 equity from that, and then you've got, if you're buying new property, well, actually assuming that you just go under the new exemptions, which is at the time of recording this, which is Friday the 22nd, Kiwibank are the only bank so far who have said that they will lend 80% on an investment property at the moment.

And again, this is what Ed was saying before, just because the LVR restrictions have been lifted, doesn't mean that banks are actually exercising their right to lend more. And again, pick on BNZ they've gone the other way and said 70% blanket across, whether it's new or existing.

So you take your $200,000 now you've got a million dollars worth of purchasing power. You could go out and buy two properties worth 500,000 have a hundred thousand and each of those, because you can lend 80% on an investment property if it's new, or if you're dealing with Kiwibank as of today, so now you've got two properties which are actually generating an income as well, because remember, land doesn't generate an income unless you're leasing it to a farmer or you've got a sheep on there or something like that.

So the types of products that are really challenging to get lending on, and therefore the banks restrict the LVR on them quite a lot is land, small apartments, and sometimes apartment blocks might get picked on. So Ed and I we're just talking off air about one project in Wellington, in Taranaki street an apartment complex there called Soho. Now it's a dog of an investment, but I've seen lots of people that unfortunately ended up buying them years ago.

And several of the banks just won't even lend on them. So if you've got one of those properties, you're limited to a couple of banks that might give you the money and they might give you 50% but generally speaking, with an apartment, particularly if it's small 30 to 45 square metres, and remember ASB define an apartment as townhouses, if there's more than five from memory. So, you might have townhouses, but they deem them as apartments cause they're five in a row. So if you're buying a one bedroom apartment and a block of six, then that's an apartment. And so they might only lend to 60 to 65%.

The other one is hotel investments. So if you've got one of these lease arrangements where you buy a room in the Heritage hotel, generally speaking, you might only get 50% on that one. So if you've got one of these, they're not investments that I think are great, but you know, they might serve their purpose in your portfolio, but they are going to seriously limit your ability to leverage against that property.

And the number one reason that property is a great investment is because of leverage. And so if you buy something that doesn't allow you to leverage, it's not necessarily, in my opinion, the best investment.

Ed McKnight: And I just want to get that comparison again with that piece of land versus going and investing in kind of standard residential investment properties.

So you had your 200 K of equity in your bare land, that'd bare piece of land and they've got you $400,000 worth of property. Your 200 K got your 400 K worth of property. You sell that you invest in investment properties and that 200 K because of the internal LVRs at the banks, because of the other people's money you are able to get, that suddenly gives you a million dollars worth of property.

And so you've got a larger portfolio size, you're able to earn income and as the market appreciates, then you get an even better return on the equity that you've got, you've invested because you've got two properties that are worth more in the first place. And so that's really what we're talking about in terms of getting a better return on the equity that you've invested in.

One other thing I just want to pick up quickly is what Andrew said when he was talking about generally speaking, the banks through this or the banks through that. And it just comes down to the fact that, especially at the moment, the banks are making more judgment calls as they become conservative.

It's not necessarily in a calculation. It's not necessarily in a strict written down policy, but they are making more judgment calls about what they'll enter, who and when and how much. And that's why in some cases, people who are aggressively growing their portfolios at the moment wanting to buy three properties may only get lending for two.

That's not in a calculation. That's just a judgment call that's being given from the bank, and that's really important to know as well. I know that a lot of investors are often ask us, you know, what's the hard and fast rule? What's the, where's the line in the sand about what is and what isn't?

You know, there are some rules in the sand and we share what the LVRs typically are as we find them, but sometimes they're not publicly disclosed. Sometimes you only find them out when you put in a mortgage application and it gets declined and you interrogate the assessor as to what was the reason for that and you find out there was a calculation or you find out it was just a judgment call.

So there are hard and fast rules sometimes. But there aren't always and it can just come down to the conservatism or the aggressive position of a bank. That's really important to know and it's something that I do see people get tripped up on again and again, but hey, let's wrap it up there.

Please don't forget to rate, review and subscribe to the podcast. It really does help us get the message out to more and more people. I really mean that. And look, if you have been listening for a while, you're thinking, I'd be interested in figuring out if I can buy my first investment property, then check out the show notes.

I'm going to drop a link there to our property investor quiz and in this quiz, you just answer seven quick questions and it will give you a yes, no, or maybe answer about whether you're in the position to invest in property. So tap or swipe over that cover art, it'll take you right 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 more daily strategies, tactics and insights to help you get the most out of the New Zealand property market.

Until next time.