The TL;DR of this is if you sell a property that has debt attached to it, you do not get to decide if you pocket the money, the bank does.
So before you sell, remove as much debt from the property as you can if you want to have use of the net proceeds from the sale. So many people do not get advice on this and have a heart-sinking moment when they realise they do not get the money and now are in a worse position because they own fewer properties and cannot access the debt again.
As we near the end of the 21 days I want to encourage you to keep learning. The 21 Days is a fantastic introduction but you’ll only make progress if you take action. The masterclasses and then the courses that become available are all designed to continue replacing doubt with action-orientated knowledge.
All of the masterclasses and the property formula workshop equip you with knowledge and also tools like spreadsheets to ensure you can apply everything to your life. Sign up for $37 for the Mortgage Lifecycle Masterclass: Stage 1, 2 & 3 Masterclasses.
This is a video from the Property Formula Workshop. There are several unlocked for you and included in this course. To get access to all videos and spreadsheet calculators please apply for the workshop.
If you have 3 properties, each worth $800,000 for a total of $2.4mn in value.
Typically you would look at one of the $800,000 properties you are going to sell, you imagine that after selling this property you will repay $300,000 of mortgage and get to keep $500k in cash (less selling costs).
But, the bank will have something to say about this.
They will reassess your position. Each of your properties is security for the other properties and the debt is treated as a total debt rather than individually on each property. You might have to pay the bank the entire amount ($800,000). Even in situations where you think it is a separate entity. If it is the same bank it is common that they are connected without you even knowing.
What happens to a lot of investors is they get closer to retirement or stop working altogether and plan to sell down 1-2 properties. This is to extract the cash for enjoying life or to replace the investments with higher cash flow producing assets.
They will take their chips off the table and de-risk. You will not qualify based on the rules of today for the privilege of borrowing the money. It might be easy for you to keep up with repayments but the bank tests in their own way, not by your way.
This often happens when it is too late to reverse the decisions and you end up with one less property and cannot get the cheap debt back. Devastating news especially if the situation was avoidable with a simple restructuring before selling the property.
How do you keep your money if you sell? The short answer is to be prepared. Get advice.
Do not wait until you lose your job, or business slows down, or you get a bit older. Do it now or when times are good. A mortgagehq adviser will help you assess future risks with your current setup.
In some cases, having properties at the same bank and cross secured is the only or best way to proceed as you might qualify for better terms and rates or it is simply the only way to move on with a property/project. Cross security has its place. But not forever.
P.S. Tomorrow we are going to look at whether getting a pre-approval is actually needed for you to press on or if general numbers will be fine to start making offers on a property.