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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

Safe as Houses?

Safe as houses an expression to satisfy a doubting person…

 

Oh…it’s as safe as houses, i.e., perfectly safe, apparently a  figure of speech used in property as an investment.

Safe as houses phrase originated when the railway bubble began to burst, and people began to turn their attention to more reliable or stable forms of speculation, which was slow and steady…

Safe as houses, let’s firstly establish your investing strategy, criteria and action plan:

  • How much money can you borrow to invest
  • How much time required for research/due diligence
  • How much money can you afford to lose
  • How much debt can you manage
  • What type of property deals
  • How far from CBD
  • What’s the maximum interest rates for borrowing

Residential real estate is almost the sacred cow of Australian investment. What if your sights are set on building a real estate empire, does it mean embracing risk with open arms?

safe as houses

Whatever real estate strategy you decide to do, just bear in mind networking is even more important in real estate than in other industries…so start pounding the pavement as soon as possible selecting the all-important team to manage your projects.

Risk, reward and reality. It’s easiest to think of property investments from least risky to most risky and analyze the pros and cons in each category:

(a) Least risky investing means acquiring and operating existing properties/buildings (buy and hold strategy)

Property investing is all about stability and getting high single-digit returns by operating existing assets (least risk when a building is already operational and generating rental income)

(b) More risky or value-add using opportunistic strategies for improving existing properties.

This is where investors aim to make substantial improvements and renovations to existing properties instead of acquiring and operating, (returns from 15–20% range, may go higher depending on how risky the strategy)

(c) Most risky which is real estate development and building completely new properties. Most risk equals highest returns?

You might think real estate development offers the highest returns because it’s also the riskiest, right?

Real estate development involves buy, sell, develop, managing properties, third party joint ventures (stakeholders) and of course all professionals including:

  • Surveyors
  • Town planners
  • Real estate agents
  • Civil engineers
  • Architects
  • Building contractors
  • Construction managers
  • Solicitors
  • Accountants
  • etc…

The real money in real estate development primarily goes to investors, which put their money at risk in the developments. To complete the construction of a new property, developers only put down a very small portion of total equity, perhaps 5% or less.

Many times the developer contributes land as the only form of equity in the project using debt and mezzanine financing to fund the entire construction cost.

You weigh up the risk versus reward before deciding. It is generally accepted the higher the reward the greater the risk. Property development slightly increases risk because of the many variables such as:

(a) Site costs

(b) Development costs

(c) council approvals and contribution costs

(d) Construction costs

(e) Resale values

Safe as houses…a thorough working knowledge of all these areas is required in order to succeed. Most of the returns go to the third party investors which come up with the rest of the funds.

safe as houses
Safe as houses

How does no cash flow from properties sound like because buildings are under development, so there’s no cash flow generated until tenants move in and rental income starts flowing.

The fees property developers charge are not great compared to the amount of overheads, sometimes there isn’t much money left to pay salaries to employees.

That’s the reason why you wouldn’t get into real estate development if money is your main goal, only do it because you’re interested in building and construction side of real estate and you’ve cash resources with small surplus to cover contingencies and enough money to invest in development projects yourself.

What if you just love every aspect of real estate? People which find the greatest success in real estate focus on the end goal of owning income properties. There are actually real estate investors from all walks of life…

Investing in real estate yourself…you don’t need to raise hundreds of millions of dollars just to buy a house. The key is to find your core strengths where you can be initially be successful, so you’re able to generate enough cash flow to own properties yourself.

So let’s take a wild stab at your future goal here…you want to make a lot of money and ideally own three or more properties debt free and outright (perhaps multiple skyscrapers with your name on them one day, might even end up with your own island one day:)

You’d also like to avoid working in a job if at all possible, and perhaps you want to make the transition from investor to developer?

As an added bonus, you don’t want to earn badges from a top notch school of hard knocks to get started, right? You’re thinking its all worth learning how to crunch the numbers, and sounds like real estate investing is a good fit for you…

How to analyze real estate deals, making sure the numbers work?

Each property is unique and brings a different value to potential investors, so it’s trickier than it sounds to find the right property.

Investors generally look at three factors when analyzing a property:

(1) Investors look at what the property/building is currently doing, how much income it has been generating and what the property-level expenses are, which gives you the net operating income (NOI).

(2) Investors look at the property to make sure it can maintain its current income.

It’s one thing to have generated strong income in the past, sometimes factors like:

(a) Mismanagement

(b) Demographic shifts

(c) Changes to the local area can drive a property right into the ground…

(3) Investors project what the building could do in the future to increase income and/or cut expenses.

Depending on what kind of deal it is, investors will focus on either the current income or the projected income.

For example, a stabilized deal which isn’t expected to see much upside or current rents which is the key valuation driver.

There are four main real estate deal types:

(1) Stabilized deals (buy and hold) are “blue-chip stocks” of real estate investing. These properties are generally recently built and currently have a stabilized high yield, e.g. 7% or 8% per year.

When investors look at these properties/buildings, they’re generally maintaining income which is currently produced. There isn’t a lot of risk with a buy and hold (stabilized deal) and also not much reward.

(2) Renovation is the next type. A property which is a good candidate for a renovation would fit the description of an older building in a stable growth sub-market (one which can support higher rent prices) could get significantly higher income or value from renovating houses, units or entire building.

There is more risk involved with renovation type deals than a buy and hold stabilized deal, because property investors are banking on future upside of renovating the property (perhaps reselling to homeowner or another investor).

Value-add deals do limit risks? Typically the property/building is in decent condition and is a tangible asset ( i.e, asset = liability + stockholders equity) which is easier to show, discuss and understand.

An asset is a resource which is expected to provide future economic benefits (i.e. generate future cash inflows or reduce future cash outflows)…an asset is recognized when:

(a) Asset is acquired in a past transaction or exchange

(b) Value of asset’s future benefits can be measured with a reasonable degree of precision

In markets where there is increasing momentum and upside, value-add deals are easier to do because it requires vision and creativity, which is fun. Downside of increased momentum is competition from other bidders dramatically increases pricing for certain assets.

However, added value is created by gaps in information and understanding. This is where real deals can be made by being innovative,
creative and diligent with the details.

Success comes from properties which others may have overlooked or passed due to their lack of motivation and understanding.

Nothing in real estate is easy, yet if you have the desire to roll up your sleeves and get a little dirty, there are diamonds in the dirt.

Real estate is challenging and rewarding and you just got to know how to dig for the value-added, diamond in the rough deals.

(3) Real estate distressed properties, these usually need a lot of work (units or building itself is in bad shape) or under performing.

Often, these building have huge vacancy rates, so the projected income is a big factor in valuation. Real estate distressed properties carry even more risk than a renovation deal because the building needs work and it is already under performing.

4) New development deals. These are just what they sound like. Development happens when an investor wants to take raw land, then evaluates what can be built on it and what kind of future returns can be generated.

Development deals have the highest risk, and also carry the highest return. In reality, you don’t necessarily make the most money with development deals, because of inherent risks and uncertainty, don’t assume highest risk equals highest profits in your bank account.

Property valuation and due diligence: You are primarily wanting cash flow and reliable cash-on-cash returns because in real estate, property itself produces the income for your return on investment.

While the numbers are generally used to support valuation, comparable sale analysis is king when valuing properties because property is only worth what someone is willing to pay for it.

In residential “yield” is often used instead of “cap rate”. Capitalization rates are used as the primary metric in property valuation.

safe as houses
Safe as houses

Cap rates are a very simple way of calculating the return on a building. Essentially, capitalization rates tell you what percentage of the funds you paid for the building comes back to you annually.

It’s just an easy metric to use; for example, if you have a 6% cap rate property and it’s at a 6% debt interest rate, you can easily see it is neutral leverage and isn’t returning any money.

Cap rates do have flaws and the biggest is everyone assumes cap rates in a specific sub-market to apply to every property within that sub-market. Simply this assumption isn’t true.

Every single property has its own nuances which makes it more or less appealing to potential investors.

If you get too clinical on only measuring cap rates, you could either be overvaluing or undervaluing your building. You really need to analyze each property/building and the market thoroughly to get a sense of how much value it is truly worth.

Another weakness, while cap rates are great to use in a city like Melbourne where buildings are constantly being bought and sold,
there’s considerably less data in other regions without as many sales taking place, so the numbers may not be reliable.

Basically due diligence means you are making sure the deal stacks up and doesn’t have more holes than a slice of swiss cheese.

Sellers want to sell their property at the highest price and investors have an interest in closing the deal.

Safe as houses, buyers need to protect themselves; due diligence is generally broken down into two components:

(1) You analyze the property at a micro level and then in the macro.

In the micro, you look at the building itself. You check the market to make sure projected rent prices at the property/building actually make sense, and people are paying those prices at similar properties in the area.

Next, you look at macro trends. You then dig deeper to make sure the tenants are in good financial shape. This is especially true if you are buying a single tenant building or more tenants in general.

You look at what other investors are paying for comparable buildings to make sure you aren’t over-paying. It’s also important to look at macroeconomic trends in the region you are investing to make sure the submarket can sustain positive economic growth over time.

Safe as Houses

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Equity Home Loans | What are equity home loans?

What are Equity Home Loans?

Equity home loans are a type of loan that involves a borrower using the equity in their house as a means of collateral.

Equity home loans can be useful in helping home owners finance huge or major house expenses like medical bills, college education or house repairs.

equity home loans
Equity Home loans - How to use equity in as a means of collateral...

Equity home loans or otherwise known as home equity loan creates a form of a lien against loaner’s home and therefore slash or decrease the actual equity home.

Also lenders and other lending institutions feels much safer with equity home loans because with your house being collateral you can’t easily hide and disappear as your home won’t vanished.

That means the lender has a much better chance of ensuring the borrower pays any mortgage owed.

Also lenders have a better chance of getting back collateral in the form of a house in case borrower wasn’t able to meet and follow provisions of mortgage contract.

Equity home loans may be referred as second tier liens or second trust deed, but they can still be assumed in first or a third position.

A lot of equity home loans needs a very good credit history or acceptable combined value from loan and reasonable value from loan rations. It also comes in dual types namely the open end and closed end.

In Australia, some equity home loans interest are deducted from an individual’s personal rate of their income taxes.

Here are some advantages of using equity home loans from the other kinds of home mortgage set ups because equity home loans remain an attractive option for many borrowers for these simple reasons:

  • Usually have a much lower APR or interest rate
  • Can be quicker to get even if you have a bad credit history
  • Payments made on equity home loans may become tax deductible
  • Borrowers have more chances of availing themselves a much bigger loan amount with this kind of loan.

Some tips to maximize your equity home loans:

To have this deal ending up working to your benefit, make sure it is the correct kind of loan to fit your financial structure.

What if an equity home loan makes better sense to meet your financial needs compared to lets say a credit card account? If yes, this may be the right kind of loan to utilise.

More importantly plan all your existing budget right away, make sure any loan you will avail will not put more burden in yourself.

Paying the premiums every month and not totally up front will also help you take advantage of equity home loans.

Equity Home Loans