Tag Archives: equity

How to Finance Your Property Investments

Financing Property Investments Now

 

Is your primary goal to add value to property through renovation or development? Why focus on one or two key strategies and specialise? We’ve seen many people try so many different strategies, never really giving any of them the focus required to get results.

Finance property investments for most residential real estate investments…it means you could be in a position to borrow and buy an investment property with a typical deposit (or surplus equity in another property) of 20% of purchase price.

While you can borrow more than 80% loan to value ratio (LVR) with some lenders, you need to factor in higher interest rates, lenders mortgage insurance and higher risks of larger mortgage payments.

Finance or be it raising funds or cash required for a deposit, plus allowing for closing and holding costs on an investment property is probably one of the biggest stumbling blocks, even if you get a 90%+ LVR loan…

Finance property investments is all about knowing how the numbers stack up, taking action and knowing what action to take:

  • Stamp duty
  • Settlement costs
  • Conveyancing costs
  • Bank fees
  • Title transfer fees
  • Other miscellaneous costs
  • Holding costs until rental income begins
  • Others sources of finance

Equity is the difference between your property’s market value and outstanding balance of all loans on property. Recycling equity is  the process where investors leverage/borrow against equity in each existing property they own to help to fund the next deal…

finance property investments
How to Finance Your Property Investments and Maximise Your Returns from Property Investments…

Finance property investments using money gifted, borrowed or pledged from family members as guarantors as a source of finance or your deposit for your next real estate investment.

Superannuation funds (SMSFs) can purchase real estate for investment. Legislation changes made in 2008 mitigated the risk to an individual’s investment portfolio by making property investment possible.

Mortgage brokers and non-bank lenders can either belong exclusively to a particular financial institution or work for a mortgage lending company which can apply for loans on behalf of their clients across various financiers.

Vendor finance – where the seller (also known as the vendor), instead of demanding 100% of the sale proceeds at settlement, accepts terms that allow the borrower to pay an initial amount at settlement e.g. 80% and then repay the balance of the property’s sale price over a fixed term e.g. 20% over 2 years at an agreed interest rate.

Types of finance property investment loans available consist of interest only whereby the borrower only pays the cost of annual interest on the loan each year and does not have to repay the principal until a later date.

Principal and interest loans whereby you’re paying a principal and interest loan means you’re paying the current monthly interest due and progressively reducing the outstanding balance on mortgage and making principal repayments, so you’re progressively paying off the mortgage.

Revolving line of credit enables you to use generally up to 80% of your equity as collateral for further credit to make future purchases. It is an option chosen by real estate investors wanting the flexibility to top-up their mortgage to pre-agreed level without having to take out a separate mortgage each time…

Non-recourse financing means the borrower, in the event of failing to fulfill the terms of loan, has their liability limited to property which the mortgage is secured against only and does not offer other asset security or personal guarantees.

Full doc loans requires the documentation of all income, assets and liabilities and is the most common type of mortgage loan used

Lo doc loans need less for stringent income information than full doc loans, but still rely on a good deal of documentation to get approved.

Low start loans offers borrowers low establishment costs, a very low variable rate for the first 6 to 12 months and no monthly fees.

Refinancing  is the process of re-financing, topping up or consolidating existing and/or new debt with the same or new lender/s. Always check the full cost of doing this and especially break fees on existing mortgages.

Deposit bonds are alternatives to a cash deposit for borrowers who have existing equity in property and want to use bond/guarantee rather than a cash deposit.

This is common when buying off the plan with a 12-24 month settlement as it avoids paying a (borrowed) cash deposit and then paying the interest on the money while it sits in trust awaiting project completion and settlement…

Finance property investments and financial competence as this proves several points:

Please never overlook the discipline of a very good understanding of banking, finance, accounting, tax and importance of cash flow management, financial due diligence, budgeting, tracking and reporting because it’s often easier to get lots of money than a little.

Frequently going after small investors is the most troubling of all and it’s better to aim at people which are more substantial.

The magic word (no) is frequently the best way to make somebody want to get involved with you even more.

Knowing your numbers and business is what makes people want to move forward. Money always follows expertise and when you demonstrate you’re an expert with tactical skills in specific areas, money flows in a big way.

And sometimes so much money flows…you just have to say no.

The loan approval process using conditional and formal approval letters:

If a loan application meets certain broad guidelines at the initial assessment stage, a lender or finance broker may approve the application in principle or indicate pre-approval.

As the application progresses, information provided by the potential borrower such as identification details, salary and overall financial situation is subsequently confirmed and credit check reports are received. The lender or broker will form an opinion of the applicant’s ability to service a loan and a conditional approval letter will be issued if lending criteria are satisfied.

Approvals confirmation – Once all the necessary paperwork has been completed, it’s normally only a short time before approval.

Make sure you read and understand everything before signing up. Keep your conveyancer or solicitor in the loop. Ask questions if there is any confusion – taking on a housing loan is the largest financial decision most people will make.

The bank valuation is a basic part of a property loan approval, which is confirmation by the lender that the valuation of a property being offered as security is sufficient to cover the loan.

Lenders instruct a bank panel valuer to perform a market valuation and analyse what percentage of the purchase price is being financed with risk profile of the loan taking into consideration other factors such as location and average time to sell property…

Finance Property Investments

Why Most Real Estate Funding Fail To Get Capital?

Real estate funding and key fundamentals of investing in the Australian residential property market are where, what and when to buy. These fundamentals are driven by macro and micro indicators.

Macro indicators show where to invest so you can focus your attention on area’s population growth, public and private infrastructure spending, employment, supply and demand and economic health, etc…

Micro indicators show what to invest in determining property’s value, quality, design, amenities, access to transportation and rental income, etc…

Real estate funding as an investor, purchaser of property or property developer, at some point in your investing you’ll run out of cash. This becomes a into problems with financing as you start to take on bigger deals or more deals at once.

real estate funding
How real estate funding works for transactions involving creative real estate strategies

Real estate funding as you take your investing to the next level and leverage finance with the banks, you may be hit with the reality that you’ve reached a limit with your borrowing.

This can stop many investors dead in their tracks, although it need not be a reason for you to sit in the corner and do nothing until you’ve topped up your cash reserves, right?

Real estate funding  is the simple answer where you ultimately tap into a world of unlimited other people’s money (OPM) to help you fund projects.

Real estate funding and the problems of inadequate comprehensive data: An executive summary is just an introduction to the project, not a comprehensive outline of the project.

A full detailed business plan which includes an executive summary, stabilized pro-forma income/expense data, complete development / construction costs data, sources and use of real estate funding data with viable exit strategy is required for review in order to determine project acceptability.

Real estate funding, no collateral and project financing implications?

All project submissions must demonstrate control of significant physical and/or marketable assets to initially collateralize funding structure as a key component to attracting investment capital (bridge, mezzanine or equity) in context to collateral offered by the project principals, which secures the return of at least the invested principal amount.

This can be in the form of  entitled and permitted market value of property or other owned real estate assets currently appraised in excess of investment amount or in the form of owned securities with a net future value equal to or greater than investment amount, ensuring the return of principal at term…

Real estate funding in context to insufficient owner equity and liquidity. Project owner’s should be able to demonstrate equity currently invested into the project and documented by the following:

(a) Documented control of property/land parcel

(b) Completed and approved site engineering

(c) Completed and approved architectural plans

(d) Documented municipal, state and federal permits, approvals for design, zoning and environmental

(e) Recent MAI full project appraisal/business valuation with feasibility, project financing, market studies

(f) Professionally presented business plan including pro-forma financial data and product marketing plan

(g) Experienced and dedicated management and advisory team comprised of industry specific professionals…

In addition, project ownership must provide evidence of ample liquidity in order to establish a valid capacity to compensate for the possibility of insufficient future cash flow should pro-forma projections not be met.

Real estate funding and lack of investor seed capital?  This is the developers and project entities largest hurdle because without seed capital, none of the above can occur.

Real estate funding …it is crucial for you, the owner(s) of the project to find an investor or group of investors which believes in your project and has the available cash and/or assets to put up in order to back the project financially.

The major issues with any investor or group of investors are safety of their principal, the projected return on investment in a relatively short time period, along with a percentage of future project profits.

As a first step, seed capital allows the developer to cover initial land and development costs (deposits, contracts, options, approvals, engineering, design, studies, appraisals, etc) which include completion of the documentation package required to prove the project bankable and qualify for applicable bridge, mezzanine and/or private equity capital leveraged by permanent financing commitments.

Real estate funding combined with opportunity and value guide you towards when to invest. Are you wanting to fast track your way into your first property development because you don’t want to waste years in costly trial and error?

Research, knowledge and education allows you to confidently mitigate risks and decide what’s best for you, because you’ve analysed all the data factors above and matched these funding criterias to your own investment property goals…does that make sense?

Real Estate Funding

Properties with Equity?

How to use equity to buy investment properties?

 

Properties with equity…what is equity? Equity is the difference between what your home is worth and how much you owe on it.

For example, if your home is worth $500,000 and you owe $200,000, you have $300,000 in equity. As you continue reducing the amount you owe on your home or value of your home grows (capital growth), your equity increases. It’s that simple.

Properties with equity and how to get equity to build wealth through property investment. Unlocking equity in your home can be an effective way to assist in purchasing rental property to help build your wealth.

Residential investment properties are a popular investment vehicle providing investment funding in the form of capital growth and rental income…

Properties with equity, what if you’re already a home owner? Firstly, you may not need to provide a deposit to fund the purchase of your next investment property. Imagine if you could leverage and harness the power of your home equity…

Home equity is the difference between your home’s market value and the balance of your mortgage.

buying an investment property with equity
Buying investment property with equity

 

What if you’ve owned your own home for a few years? There’s a good chance you have by default already built-up some reasonable equity (in context to capital growth), and this can be a valuable resource when it comes to buying property investment.

Here’s how it works. Let’s say you want to buy an investment property with a market value of $400,000. There are also additional purchase costs (legal fees, stamp duty and so on) of $20,000, bringing the total cost to $420,000.

Assuming that you meet the loan approval requirements, a lender fund 80% of the property’s market value (potentially more if you are prepared to pay Lenders Mortgage Insurance LMI)…

Meaning the bank lends you $320,000 to buy the investment property. As the total cost of the property is $420,000 you still need an additional $100,000 for the deposit. This can come from the equity in your existing home.

Let’s say the market value of your existing home is $500,000 and the balance of your mortgage is $300,000. The difference between the two is $200,000, which is your home equity.

Properties with Equity in context to an investor because it means you can access up to 80% of your home equity (without the need to take out LMI), which equates to $100,000 in this example .

Instead of coming up with a cash deposit for the additional $100,000 needed to buy the investment property, you can take this from the $100,000 of accessible equity in your existing home.

The available equity in your home is calculated at 80% of your home (without the need to take out LMI) less any current loans, which equates to $400,000 less $300,000 = $100,000.

Alternatively some lenders lend to 90% of the property value less the existing mortgage, where lenders mortgage insurance would be paid on the amount borrowed over 80%.

You should note many property investment gurus say it is important to repay the loan on your home as soon as you can.

properties with equity
Properties with equity

 

The equity which is drawn down from your home to purchase an investment is tax effective, however any remaining debt on your home is not. Therefore the loan on your home costs you much more on an ongoing basis than the loan on your investment property.

Properties with equity…property you live in is not the only source of home equity. You can also use the equity in an existing investment property to help fund other property purchases/buying investment property.

Contact your mortgage broker to help you work out how much equity you can access in your property and how it can be leveraged as a source of funding for your next investment property.

Properties with Equity