The scenario
My team was approached by a couple who were first-time mum-and-dad investors looking to set themselves up for a comfortable future. They had previously tried to obtain finance through their own bank, but it hadn’t worked out, which is when we got involved.
They had solid financials with few debts, but they also had two dependants and a large mortgage. Their home had some equity in it, but they were cash poor, having put their children through private school. They had already paid a deposit on an investment property in Melbourne and wanted to buy another investment property in Brisbane.
The couple were keen to grow their portfolio and set themselves up financially for the future by buying a few investment properties to hold for the long term. However, their cash flow was already very tight, and they didn’t want to add any additional strain to it.
Their primary goal was to pay off their own home as soon as possible, and they planned to fast-track this by investing in property and using the growth in value to ultimately pay down their own loan. They had advised their previous broker that they wanted to stay with their current lender. Their broker ordered a valuation on their home and the Melbourne property. Both came in lower than expected, and serviceability and funds to complete came up short for the second purchase.
The clients were disappointed that they couldn’t build a portfolio like they’d hoped. They were concerned about the negative cash flow and the impact it would have on their finances if they proceeded with the deals based on the low valuations, and they didn’t fully understand how the property’s cash flow would impact future purchases. Not happy that they were required to contribute additional funds due to the low valuation, they sought a second opinion.
The solution
The clients reached out to us, and our team looked into their situation. We created a property profile report to support a higher valuation, and arranged for two more valuations with two separate lenders to be done on the couple’s home. Fortunately, this resulted in higher valuations and enabled them to release more equity.
While the clients were keen to set themselves up financially for the future, their cash flow was already very tight, and they didn’t want any additional strain
We presented the new package to the clients, including the valuations and fees. We explained the benefits of refinancing to a new bank – and the fact that the lender had a $2,000 cashback offer that would cover all the refinancing costs and more definitely helped.
Through the process of working with us, the clients gained a stronger understanding of the way a property’s cash flow impacts future borrowing capacity. They targeted a cash flow positive property with a delayed settlement to assist with servicing. Multiple valuations were ordered in advance for the two investment properties, ensuring we had valuations on the dollar. Then we indicated to the clients which bank would be best suited to their situation.
The two investment purchases were structured as standalone debts using the equity release to cover costs but also to provide a buffer. This approach enabled the clients to purchase two investment properties. It also meant they had enough surplus equity to cover any holding costs for the properties so they could avoid having to use their personal savings.
Valuations can vary greatly between lenders, and borrowers aren’t always aware of this. We were pleased to achieve this result on behalf of our clients and give them peace of mind. The cash flow positive purchase also balanced out their portfolio, resulting in a neutral cash flow portfolio, eliminating some of their cash flow worries.
The takeaways
As the clients’ primary objective was to build a property portfolio to set them up for a more secure financial future, it was important to first educate them about the different aspects of finance and how it could impact their ability to grow their portfolio in the future.
We explained how banks lend money, how they analyse loans based on their servicing considerations, as well as the big advantage of prioritising strategy over loyalty to a particular lender or interest rate.
Many novice investors will approach finance with a homebuyer’s mindset; that is, they want to get the lowest interest rates, and they prefer to work with lenders they know. But investors are generally better off focusing on how they can structure their finance to support multiple purchases. This includes getting the best valuations, placement and structure of deals and understanding how property selection and thus cash flow impacts servicing.
Having cash readily available is important to most people. Simple strategies to release as much equity as possible, with sufficient buffers in place, go a long way in protecting clients as they grow profitable portfolios.
Jason Paetow
Mortgage broker and managing director,
AllianceCorp
