You’ve heard the stories.”I built a 10 property portfolio in 17 months…”To build that fast. You need. Infinite Growth.
To rapidly build a portfolio requires a specific lending environment.
Perhaps you’ve thought, “that was possible back then. But not now”.
During recent years – it has been extremely difficult to establish or grow property portfolios quickly.
But that wasn’t your fault.
The restricted limited lending environment has meant that most Kiwis trying to build a property portfolio have had to go much slower than they would have liked.
But the world is changing. The key numbers have changed.
When you buy your first house the two key numbers are your deposit and your borrowing power.
When you buy your first home you can sometimes get approved with as low as a 5% deposit.
However, when you buy an investment property (the 1st or the 20th) you need a bigger deposit. In the last ten years, there have been radical changes in how large a deposit was required for investments.
We witnessed a ‘boom time’ when people could buy investments with as little as a 20% deposit.
Then the Reserve Bank slammed on the brakes by creating tougher rules which limited banks to accepting 40% deposits, these have recently been reduced to 35% and then 30%.
On June 5th 2019 we have secured a new lending product, which is happy to offer investment mortgages for investors with deposits of just 15% – 20%.
As experienced investors have already figured out, you do not need a cash deposit… you can use your equity. Based on the LVR and equity your portfolio current has, you might be able to keep buying properties with 100% finance.
Equity recycling is where you have a deposit (it could be made up from cash, or available equity in your portfolio or home) and you use that deposit to buy an investment property. By increasing the value of your new investment you are able to pull the initial deposit out of the investment and recycle it into a new investment. This is the key to building big portfolios fast.
Rapid equity recycling is virtually impossible when you need a 35% deposit.
To increase the value of your investment there are two key strategies;
- buy undervalue (negotiate a very good price and you have ‘instant equity’)
- increase the value via renovations or refurbishments
- ‘capital gains’ is a close 3rd but it can not be relied upon to build a portfolio quickly.)
Equity recycling requires you to build equity in your investment allowing you to pull out your initial investment. When banks required a 35% deposit it was virtually impossible – it is very difficult to build that much equity instantly or quickly. But, if you are using a non-bank lender (like our new lending product we have secured) which only requires a 15% deposit it becomes doable.
Using our new 15% or 20% deposit lender rapid equity recycling is possible again.
You will definitely still need to be skilled at investing, but it is doable if you put in the effort. For example, if you can buy a property under value by just 5%, and then add 15% by renovating you will have created equity of 20% ready to use to buy the next property.
The second half of the growth equation is your ability to service the debt. You may have been in the position where you make a great investment and are ready to recycle your equity out to buy your next property but the bank declines your application because of your servicing ability.
Behind the scenes, lenders are assessing your monthly income then subtracting your monthly expenses to calculate your UMI (uncommitted monthly income). They then take your UMI and see what repayments you can afford. This determines how much you can borrow and will differ depending on the bank or lender.
The magic for investors is hidden behind how our new lender calculates your monthly expenses, they calculate your existing mortgages at a lower test rate than the main banks.
Main banks are using a test rate of around 7.25%, this makes it virtually impossible to find properties that will service themselves.
Banks also shade rental income by 75% (feel free to discuss this in detail with an adviser), but basically, this means for your investment property to make a positive contribution to your portfolios servicing ability it needs to have a yield of 11%.
For example, if you had a UMI of $8,500 before counting any mortgage debt. If you have $1,000,000 of lending with a bank on a 25-year Principal & Interest loan at 3.95% the main banks would calculate that as a monthly cost of $7,228. Leaving you with a complete UMI of $1,272. With that, you could afford to borrow approximately $175,000.
Our new lender would calculate that million dollars of lending as having a monthly cost of $5,221. Leaving you with a complete UMI of $3,279 and allowing you to borrow $450,000.
Our new lender uses your actual principal & interest loan’s actual interest rate as the test rate, this makes it achievable to find properties that help.
Our new lender also shades rental income, but only by 80%. To find investment properties that make a positive contribution to your portfolios servicing ability you need to find properties that have a yield of 8.5%.
The new lending environment means you can scale portfolios infinitely by finding properties that:
- Have a yield of 8.5% instead of 11%.
- Have instant equity of 15-20% instead of 30%
You are most likely reading our website because you have some questions about your mortgage, your rates or your options moving forward.
No one is going to pressure sell you anything on the phone.
You will learn your options, and if all that happens after you’ve invested 30 minutes of your time:
You are going to sleep that night with the confidence you have everything set up correctly and a fair interest rate. you discover you can buy that extra property – it could be the catalyst you’ve been hoping for.
So don’t waste time wondering ‘what if’. The Mortgage Advisers at iRefi.co.nz are friendly, approachable and knowledgable. Book a time to talk to someone and get the advice you need.
What is the bloody point anyway?
Financial Freedom! Most Kiwis will never have a system in place that delivers consistent income without much effort. If you want to have passive income that supports and enhances your lifestyle, especially as you get closer to retirement each day. A few property investments bought well, will improve your life.