How to make lenders take notice
Your ability (or inability) to fund property investment purchases really hinges on your capacity to access finance. The truth is, finance is king for the property investor.
If you slow or prevent access to finance, everything else slows down. If your plan or goals involve buying properties, but you haven’t got a hope of getting the necessary finance, obviously your plan is useless.
This happens to a lot of wide-eyed, would-be property investors. They attend a seminar or read a book and come away with a fanciful plan of buying 20 properties. Of course, they are then left with the conundrum of how they will actually achieve this momentous goal, and rarely even consider if they can afford it.
Access to finance is a key element to initiating and following any investment plan and in essence you should look at a mortgage as an asset. Why? Because in the case of property, finance is an asset that will help you get to where you need to be.
Managing this risk
Access to finance will make or break your property investment strategy. Once you have developed your property and financial plan, you need to have a conjunctional debt plan as well.
Your debt plan should account for any changes in your lifestyle and income, such as starting a family, and how these changes are going to affect your borrowing capacity and therefore when you can acquire further investments.
Having a plan based on how you’re going to finance your portfolio, when you’re going to borrow and where from, whether you have the capacity to service that debt and so forth, is essential in mitigating the risk of not being able to afford your investments. A good mortgage broker might help you put a debt plan together (or even prepare it for you – we do in our business).
How much will they give me?
To create your debt plan you need to understand what drives borrowing capacity, how borrowing capacity works, how lender’s credit policies work, etc. To educate yourself in this respect, I suggest you speak to your bank or mortgage broker and present your financial strategy to them.
The very fact that you have bothered to create a financial strategy will impress lenders and brokers alike and demonstrate that you have considered things such as cash flow, your ability to pay your debts and so forth. This gives them peace of mind when it comes to handing you the money you are seeking and, in fact, they will probably be a little more flexible than they otherwise might be.
Often, if you approach a bank with your investment objectives and plans well documented, highlighting your intentions to buy several properties over a certain period, they will be more likely to consider forming an ongoing relationship with you.
Even better, if they see that after you make those few initial purchases you manage to repay your debt and service your loans correctly, they will be happy to continue the relationship and take greater risks with you than they otherwise might.
Actioning a debt plan based on your financial and property plan, as well as understanding your borrowing capacity, is critical in managing the risks associated with financing your investment purchases. Part of that plan involves making sure that you understand how what you do today and the changes you make outside your financial life will affect your financial plan tomorrow.
A good example of really poor planning is when investors go out and buy an off-the-plan property that doesn’t settle for two years. Almost forgetting that they have made this commitment, they then buy further properties, exhausting their borrowing capacity before they settle on that first purchase.
This type of mismanagement highlights the fact that you really need to know what you want to do with your investment strategy and what you have to do now and in the future to meet those objectives.
In making these allowances, you will be one step closer to ensuring that you don’t get caught in a situation of not being able to acquire more property because, ultimately, acquiring more property is going to get you where you need to be a lot quicker.
For more information on how you can profit from investing in Australia’s residential real estate sector by establishing clear investment goals and strategies, click here to contact us, or subscribe to receive regular post updates and industry insights.
Stuart Wemyss is a chartered accountant and founder of Property Tycoon Finance. Email: firstname.lastname@example.org
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