From the outside, Property Investment can be an attractive investment strategy to set you up for retirement, as well as a Kiwi Dream. However, at Kris Pedersen Mortgages, being property investors ourselves we understand that it isn't always easy navigating the property investment landscape, and having the right advice and a strategy is going to be the difference between where you are, and where you'd like to be.
If you're looking to use Property Investment as your retirement plan, then being able to understand your mortgage options is crucial to your success. We work with numerous lenders - both main-bank, and non-bank lenders and can explore all options to help you achieve your goals.
One area we see a lot of investors make a mistake is that they tend to start by purchasing their own personal residence and then go straight back to the same lender to fund their first investment purchase. Often the lenders involved state that they can be 100% financed into this and future investment purchases which is actually achieved by utilizing equity built up in the family home and hooking the loans and securities together.
If something goes wrong this situation is beneficial for the lender as they have complete control however not a position that is good for the borrower as they have very little control.
We recommend adopting a process called split banking where we look to keep the family home with one lender who we won’t look to have any investment properties also secured with.
We then look to get a revolving credit facility (a large overdraft but at mortgage rates so you only pay for what you use) set up against the family home from which you take deposit funds and also renovation funds if part of your strategy is to tidy the properties up.
We then get a preapproval in place with a secondary lender for 80% of a proposed purchase price so that when a potential purchase arrives you have the funding in place to move quickly.
With your investment purchases you should aim to purchase properties either at a discount or where value can be added. Even if you don’t achieve this you should over time get some capital gains and we then look to go back to the secondary lender and top up to 80% of the increased value and then use these funds to reduce the balance on the revolving credit facility.
To find out more if split banking is for you please either contact us for a Finance Strategy Meeting HERE or download our One Bank Trap eBook above.
While it is relatively simple to understand the equity / deposit requirements which lenders have in place we find many property investors hit brick walls eventually as they don’t understand the way that most lenders assess servicing.
As an investor, you want to start by assessing what it is that you want to achieve from your investments and use this to set purchasing rules. As an example, this may be trying to purchase the properties at a certain discount to what you believe the property to be worth and also a certain return.
We recommend that investors set their return goals based on net yield (annual rent minus rates and insurance costs divided by purchase price) rather than gross yield (just the annual rent divided by the purchase price).
Thus when looking at a prospective property purchase as an investor you will look at the numbers as a basic profit and loss however note that the way the lenders look at the numbers is quite different.
Key points to note are:
What tends to happen is that even if you can source positive cashflow properties often with the way lenders assess numbers they look negative to the lender. This means that most investors only have so much servicing before they hit a brick wall and can’t borrow any more unless they can increase income or decrease debt levels to a stage where servicing works again.
For more in-depth information around this - check out our blog here.
To start it is worth understanding why many investors look to utilise interest only mortgages.
Firstly, it is recommended from a tax point of view as if you still have personal debt (i.e a mortgage on your personal residence) it makes sense to consider paying off personal debt prior to paying off investment debt as the personal debt is not normally tax deductible.
Secondly, you will hear often from speakers at property investment events that it is better to focus on going interest-only and using the increased cash flow to purchase more properties than to focus on reducing principal. The argument in favour of this strategy is that you can gain more wealth from capital growth than you can from paying off principal. While this argument has some validity especially over the last couple of property cycles there are other considerations such as:
While everyone is at different stages of their lives in regards to both age and investing experience, what we often recommend is to look to structure the mortgages in such a way that:
Kris has provided us with outstanding service as our mortgage broker.
Previously to Kris, we had worked with two brokers who both had excuses as to why they could not find us the finance we required.
Kris spent time understanding our goals and financial position and gave us plenty of finance options to consider.
Kris works hard to understand what finance options will work for each particular property and how to improve your borrowing potential for future purchases.
Kris has the all important ‘can do’ attitude.
I have recommended Kris to several of my investor colleagues.
I met Kris by recommendation a few months ago.
Since then Kris has helped me and my friends to obtain finance for various properties.
I enjoy dealing with Kris very much because he thinks fasts and acts promptly. He is also very experienced and upfront; he often can provide valuable advice on the spot, which I value a lot.
I recommend Kris to my friends without hesitation.
From working with and knowing many mortgage brokers, I know that many understand finance but have a poor comprehension of property investment.
With growing my investment portfolio I needed someone who understood both.
Your knowledge, the advice you imparted and speed at which things were put together were invaluable for me in securing my latest investment purchase.
Until my next one.
After trying for 2 months to get short term bridging finance through 2 banks and another broker with no result, I approached Kris and had iit sorted within days.
Very efficient and great communication.
I just wanted to let you know that Ryan Smuts has been fantastic to deal with. He is very pleasant and easy to deal with and keeps us up to date all the way about where things are at.
He has managed to pull off a loan approval when the banks are holding on to their money for life and look for reasons to shoot down loan approvals.
We are very impressed with Ryan and he is a great asset to your team.
Buying my house on my own was a pretty stressful process, Ryan and Serena worked brilliantly with me, my lawyer and banks to secure my new
mortgage and home on the same day as settling on my previous home! Highly recommend this team.