Whether you’re buying your second investment property or your 22nd, the information below may be of some value to you. From using your equity to choosing the right lender, here are six tips you can follow to buy multiple investment properties.
1. Leverage Your Equity
You may have enough equity in your home to help you buy several investment properties, provided you know how to access it.
If you’ve owned your home for a few years, then the payments you’ve made on the principal of your loan, and any increase in the value of your home, will have built up your equity. You can access the equity and leverage it to buy your next investment property.
To do this, you can either use a home equity loan or a cash-out refinance. Your larger portfolio can then build more equity and boost your rental returns. Remember, however, that there are many things you’ll need to do to be a successful owner of an investment property. Make sure your tenants are happy, boost the value of the property through smart renovations and make sure you get regular property valuations done, especially if the market is experiencing a boom. For more on owning an investment property, visit our guide here.
2. Increase Your Savings
Low-deposit and no-deposit investment loans are available. However, lending criteria for them can be strict and most lenders will require equity in an existing property.
So try to save a deposit, as it provides greater security to the lender. Here are some ideas for building up savings:
- If you already own several investment properties, save the rental income to fund your next investment property purchase.
- Aim for positive cashflow on your first rental properties, so you can use the excess rental income above the cost of ownership to fund the purchase of future properties. Use our investment property cashflow calculator to determine whether a particular property or home loan can potentially generate positive cashflow for you.
- Get a side hustle (second job).
3. Increase Your Borrowing Power
Pay close attention to your debts, as excess debt, and certain kinds of debt, will affect your borrowing power. Take these steps:
- Do not take out personal loans, car loans or leases, as they are short-term debt and can greatly reduce your borrowing power.
- Avoid initiating more credit enquiries. For debts that you already have, make sure they’re paid on time and in full. If you are struggling, consider debt consolidation.
- Reduce your credit-card limit and close out cards that are no longer in use.
- Look through your expenses and see if you can justify the amount you’re spending. If not, cut down.
- Some types of expenses are taken on top of normal spending; these often include private school costs, child care, and private health insurance. Reducing these expenses may increase your borrowing power greatly. For example, if your children can stop attending child care – perhaps you have extended family members who can help raise the child – this may potentially increase your borrowing power significantly.
Use our borrowing power calculator and compare results from three different lenders.
4. Choose The Right Lender
You might be tempted to stay with the lender who financed your home when looking for an investment loan. However, this limits your options. Other lenders might offer you a better deal or more borrowing capacity. Many have niche specialisations and great offers on investment loans.
Pros And Cons Of Borrowing From The Same Lender
|Some lenders might give you an interest rate discount, particularly if your new loan greatly increases your total amount borrowed.||You’re putting all of your eggs in one basket. If you default, the lender can choose to seize the property with the higher value (which is usually your home). Also, multiple loans with one bank might increase the size of the serviceability buffer applied to your repayments, reducing your borrowing power.|
|It is convenient to access and track all your loan accounts, as internet banking and other facilities are in one place.||The bank might require cross-collateralisation of your loans, which increases your risk.|
The Risk Of Cross-Collateralisation
If you have more than two loans with one lender, it’s likely that your loans are cross-collateralised by default. It’s best not to offer a lender security over more than one property. There are a number of reasons why cross collateralising can be dangerous:
- First, if the investment property falls in value, the lender could force you to sell your home to pay off the debt.
- Second, when you sell the property for capital gains, the lender could use the profit to pay down the debt on your other loans.
- Thirdly, if you wish to refinance one of the properties for example to release equity to do renovations, the lender will need to approve of the transaction otherwise they might not allow the 1 property to be refinanced alone. This means the bank will likely want to do a new valuation on both properties, and unless they are satisfied with the overall loan to value ratio, they might not allow you to refinance or release equity.
Pros And Cons Of Borrowing From A Different Lender
|You will usually retain the control to either refinance or sell the property without the bank potentially looking at your other properties.||Your overall interest rate may be higher, as the amount you borrow from each bank will be lower.|
|If you get into cashflow issues with one of the rental properties, only the bank that has security over that property will know about it.||You might face duplicate fees.|
When you diversify where you keep your loans, you have a chance to check out which lenders offer you a deal that favours your investment strategy and maximises your borrowing power.
Get Help From A Non-Bank
Banks currently have significant buffers in place on existing mortgages. This places enormous strain on how much you can borrow. When you send through your application, they don’t just look at your raw rent and repayments. They look at the investment loan plus a big interest-rate buffer, and they factor in the expenses of owning an investment property.
Most lenders also count just 80% or less of your rental income (called shading your income) when assessing your ability to repay the loan, and add a buffer of, say, 2% when determining your serviceability. They end up determining whether you can afford the loan by using a figure much higher than what your actual repayments would be.
Non-banks may potentially use a figure closer to the actual repayment you would be making; for example, if the rate advertised was 3% and the bank uses a 2% serviceability buffer, the bank would use a 5% interest rate to calculate serviceability. However, non-banks may use 3% plus a reduced buffer or even no buffer at all.
Let’s say you own three properties, each worth $500,000 and with a balance on each mortgage of $400,000, which is a total debt of $1.2 million.
- Repayment for $1.2 million at 3% (for 30 years) = $5,059 a month*
- Repayment for $1.2 million at 5% (for 30 years)= $6,442 a month
If you don’t have borrowing power left with your current lender, in a theoretical example, we can move the three properties to an interest-only loan with one new lender, at 3.5%.
- Interest-only repayment for $1.2 million at 3.5% (assuming five years interest only, total loan term 30 years) = $3,500
We then go to a non-bank lender who will review your serviceability based only on your $3,500 actual repayments. So you pay $3,500 a month, instead of $6,442.
The $2,942 you save each month can help you add another property to your investment portfolio.
*Note: Repayment calculations were made using this calculator
There are some trade-offs when you apply with non-bank lenders. Their interest rates are often higher, they have more postcode restrictions on where you buy a property with their loans, and you may get to borrow only up to 80% of the property value.
At Home Loan Experts, we have over 50 lenders on our panel, including non-banks and specialist lenders. Call us on 1300 889 743 or enquire online and we can help you find the right lender.
5. Buy Properties Below Market Value
Instead of aiming for one high-value property, you can build your investment portfolio by buying several more affordable properties. Houses and units usually sell for less than market value when they have been on the market for too long or the seller needs quick cash.
You might find hidden gems if you look at emerging suburbs that are experiencing strong rental growth. While some low-value properties might not experience strong capital growth, having them diversifies your portfolio and you earn rental income from it.
Buy Property At The Right Point In The Cycle
When looking at the property cycle:
- Find areas that have hit the bottom end of the cycle and are slowly rising. Buying at the height of a boom can be particularly expensive.
- Do not buy in areas that will not grow in value in the long term.
6. Structure Your Loan Properly
It’s common for investment loans to be interest-only to allow property investors to minimise payments and maximise tax deductions. However, remember that interest-only repayments mean you’re never truly paying off your loan.
Also make sure the interest-only periods on your loans expire at different times so you’re not overwhelmed with the sudden increase in the size of the repayments.
Make Use Of Your Offset Account
Any extra that you saved during the interest-only period, put it into an offset account. You can also put the rental profit there. The money in your offset can be used to pay the holding costs for several rental properties.
Fixed Or Variable Interest Rate?
Choose a fixed or a variable interest rate based on your investment strategy.
A fixed interest rate appeals to borrowers who require the predictability of set repayments and can afford to delay paying off the principal on their loan. The consistent repayment amounts help manage budgeting and cashflow. If you expect interest rates to go up, low fixed rates are ideal for long-term properties with steady capital growth.
A variable interest rate appeals to borrowers who want to tap into equity or pay off their loan sooner, or those who believe interest rates may be lower in the future.
You can opt for a split mortgage if available, which lets you make some repayments with the flexibility of a variable rate and make others with the peace of mind of a fixed rate.
We Can Help You Buy Multiple Investment Properties!
A combination of these methods will help you finance multiple investment properties so you can build a property portfolio.
Discuss these options with a mortgage broker today! Call us on 1300 889 743 or complete our free assessment form.