10 Finance Secrets for Property Investors

The use of finance to leverage ones wealth is the oldest wealth secret of all.

1. Know your numbers. This is the most important yet most often overlooked step, as property is one of the easiest investments we can make. What I mean is, you can find a property yourself, then if you have the means the bank will give you a loan and overnight you are a “property investor”.

Are you really an investor? Do you know what your net yield is on this investment? Do you know the internal rate of return? Do you know how much this investment costs you? Do you know who is paying what– tax man, you or tenant? What are the risks and how can you mitigate them in advance? How much will it cost you to sell this investment?
2. Structure your assets. The way you hold an investment will affect your cash flow, return, finance and capital gain. If the purpose of investing is to make money, it will take more than just capital growth. Especially if the investment cripples your cash flow in the process of gaining capital growth.
3. Leverage your money. Finance is the tool of leverage that enables us to take our current means (deposit and cash flow) and multiply them to gain a larger investment in the market. The difference between property and shares is not the performance of one investment return over another. It is the risk of the underlying security that determines the leverage you can get against that asset. Even within the property class, the banks will assign different leverage ratios depending on the perceived risk of the security, not the return.

The leverage ratio is called LVR it stands for loan to value ratio. For example: The bank will lend at a lower ratio to a commercial security (70%) over a residential security (95%). In the same way the LVR can change between locations and security type ie Metro to Regional location or inner city studio apartment to acreage property. The LVR will determine your return on investment and your means to be able to invest. As an investor the bank’s LVR’s are worthwhile to consider, even if you have the current means to make this investment work. You should consider who will purchase your property in the future and how easy it will be for them to fund the purchase.
4. Use LMI. Lenders mortgage insurance is a risk premium charged by most lenders when you borrow more than 80% of the residential property value. When purchasing an investment property LMI could be used as a risk protection not just for the bank but for you. If you purchased a property worth $400,000 without LMI you would be required to contribute 20% deposit of $80,000. Alternatively, if you used LMI and borrowed 95% you would be required to contribute a deposit of $20,000. The cost for the LMI fee is at most 3% of your loan amount. Some lenders will capitalise this cost to the loan. As a property investor this is a tax deductible borrowing cost.
5. There is more to finance than interest rates and fees. What is important is credit policy. Unless you are a finance professional, this will be hard to do this on your own. If you apply for finance direct with the bank you are exposing yourself financially without even knowing if this lender is suitable for your needs. A finance professional has access to credit policy, servicing requirements and security requirements to recommend best fit before an application is even presented to a lender for approval.
6. Know what it costs you. Property is a costly investment with some fixed but most variable expenses. The variables are interest rate fluctuations, loss of income and damage to your asset. The most common mistake that property investors make, is not preparing themselves for these (in some cases not even knowing what they are). People will insure the building yet they fail to protect themselves against the other risks. The worst thing that happens when investors don’t take these costs into consideration, is they need to have an untimely sale.
7. Don't put all your eggs in one basket. There are two schools of thought that are commonly marketed: one that promotes using different lenders for each property, the second is bundling you finances to reduce fees and costs. The first is usually promoted by finance brokers or property investors, on the basis of reducing your risk. Banks commonly promote the other.

What an investor needs to determine is: what assets do I have, what money do I need and what lender will best service my needs. It is not beneficial for an investor to have either of these fixed views. No matter where an investor secures his finance, he needs to ensure that he meets the financial commitment in accordance with the contract. An investor will know in advance of any lending institution if they are not able to make this commitment.

The goal for the investor should be to control his assets. The person in the most control is the one who has the most access to the security. For example if the bank holds a security with a loan at 40% of the property value, who has the most control? The bank. If you have a loan at 80% of the property value, who has the most control? You.

As an investor, your objective you should be to have access to credit against the security or release it from the bank.
8. Access as much debt as you can, when you can. There is a saying “asset rich cash flow poor.” Access to credit can be a funding tool if cash flow is strained. This will avoid the untimely sale of an asset. For an investor it is important that they have access to this in advance. This could assist an investor nearing retirement, or an investor who collects the tax benefits from their investment after they lodge their tax return.
9. Manage the cash flow of your investments. When we invest, there are a number of tax benefits that we receive. However, it is important to know how you are going to cash flow the investment. The best way to optimise your tax benefits is to have them each pay cycle, instead of the end of the financial year. Especially if your serviceability with the bank has taken these into consideration. If you can’t put a tax variation in place to receive the tax benefits each pay, you need to wait until you lodge your tax return. Then you need to ensure you can meet the expenses with your cash flow or have a cash reserve available until you receive your tax rebate.
10. Debt for purpose. Use the finance products that best suit your asset. Even though a residential interest rate maybe less than a car loan, it is better to take out a car loan where the debt is repaid inline with the asset value. If the property needs renovations and you have equity available, try to secure the finance on that asset. If you are purchasing a property in your super fund, get a loan against that property instead of using equity against other assets. Don’t use investment equity for personal lifestyle. A common mistake that people make is basing a financial decision on price only.