Leveraging off Existing Property to Grow Property Portfolio

LOneforall on 22/03/2018 - 10:12
Last edited 22/03/2018 - 10:16

I was curious on how leveraging on property to purchase another property works.

If you were to purchase an additional property leveraging of a property in your current portfolio which has an existing loan, would you need to have 20% security allocated for the initial loan on the property and then with the remaining equity be able to unlock up to 80% off it (to keep 80% LVR assuming no LMI is used)?

Here's an example:

The assumption is the loan for the first property is interest only and no principal has been repaid at the time of purchasing the second property. I also understand lending is also dependent on your serviceability.

1st Property
Purchase price: $500,000
Loan: $400,000
Deposit: $100,000 (80% LVR)
Market value after 2 yrs: $600,000
Equity: $200,000 ($600,000-$400,000)
Equity - Loan security: $100,000 ($600,000-$500,000)
Useable Equity - $80,000 ($100,000*0.8)
LVR: 66% ($400,000/$600,000)

2nd Property
Purchase Price: $300,000
Loan: $300,000
Deposit : $0
Security: $60,000 (Leveraging off 1st property)
Equity: $0 ($300,000-$300,000)

Overall Portfolio

After purchasing the second property here is the portfolio.

Portfolio valuation: $900,000
Equity: $200,000
Loan: $700,000
LVR: 77%
Useable Equity: $27,000

Financial

Comments

  • altomic on 22/03/2018 - 10:18
    +4

    You should read Alan Bond's book "How I leveraged my properties to buy more properties to leverage to buy more properties"

    • Oneforall on 22/03/2018 - 10:21
      +2

      Cheers for the suggestion. I could not find the title. Could you link me to a site with the book details?

      • altomic on 22/03/2018 - 10:50
        +3

        sorry, humour.

        property leverage was how Alan Bond made his money. but he had very friendly property valuers who would over value properties so that he could use the leverage to buy more property, which, a few months later would be re-valued at significantly increased value to allow more leverage and hence more property purchases.

        • Oneforall on 22/03/2018 - 11:09

          haha figured!

          Interesting.

          I understand the concept, just need to clarify the existing security used for the first loan.

  • TheBilly on 22/03/2018 - 11:06

    I just did this. You have to maintain 80% on the existing properties bank valuation, and 90% on the new property. Everything left over is what you can play with effectively.

    Example

    House 1

    Value = 500k
    Debt = 300k

    500k x 0.8 = (400k) - 300k = 100k that use can use for next purchase. So in that 100k you have to ensure 90% LVR.

    • Oneforall on 22/03/2018 - 11:18

      Using your example:

      Value = 500k
      Debt = 300k
      LVR = 60%

      In my example I do not want to pay LMI and therefore want to maintain 80% LVR.

      I think I understand the concept now and cheers for that.

      Why 90% on new property?

      • TheBilly on 22/03/2018 - 13:11

        Why 90% on new property?

        That is as high as you can go for an investment. I know ANZ does 93% but to existing customers only.

        I think I understand the concept now and cheers for that.

        All good

        • Oneforall on 22/03/2018 - 13:23

          If more than 80% wouldn't this incur LMI?.

        • TheBilly on 22/03/2018 - 13:25

          @Oneforall:

          Yes higher than 80% incurs LMI

          Under 80% does not incur LMI

    • dcep on 22/03/2018 - 11:57

      should you leverage your PPOR ? as some reckon to pay off PPOR asap

      • marcusv on 22/03/2018 - 12:48

        I'm in this boat. I would pay off my PPOR ASAP and then when I am mortgage free save cash to buy another outright or with a small loan. OP's plan could come undone with interest rate rises, a change in financial situation and/or a drop in value.

        • Oneforall on 22/03/2018 - 13:25

          I've currently changed my negatively geared property to be positively geared and thus I no longer need to be reliant on capital gains and my risk to interest rate rises are less.

      • TheBilly on 22/03/2018 - 13:18

        It depends on what you are after to be honest - I wouldn't say it is right or wrong. I'm in my 20's so I'm taking more calculated risks than what you would otherwise - I have a lifetime to generate superannuation which I can fall back on if my property investments all fail, so for me it is worth it. If I was 40+ I wouldn't bother, as I will not likely see the benefits of that investment risk for 10-20 years anyway by which point it probably won't matter.

      • Oneforall on 22/03/2018 - 13:34

        I believe it's all about opportunity cost.

        Your PPOR has no tax deductible costs.

        E.g Interest rate on house is 4%

        Rental yield on purchasing an additional property outweighs the 4%.

        Your opportunity cost of paying off the PPOR is the difference in earnings from the other property (if it is more). However, tenancy is not guaranteed and there can be variables affecting your return such as longer tenancy rates or the market hindering rental income growth.

        Also keep in mind you can only access 80% off the equity you repay in your PPOR as opposed to investing it directly in a new property having access to 100% off the funds.

        Also paying off your PPOR can take a while depending on your income. In the time you tried to pay off your PPOR you could have invested in a one or more investment properties which could have had a capital gain (depending on your strategy). You might be able to purchase a negatively geared property and hold on (and perhaps create equity) until it is neautrally geared or positively geared to make your asset self-sustainable.

      • The Wololo Wombat on 22/03/2018 - 13:41
        +1

        I'm all for leveraging PPOR. Just ensure you can cope with rate rises or tenants not paying and make sure you have good landlord's insurance.

        • hoey888 on 22/03/2018 - 14:52

          Just for clarification

          1) Leveraging PPOR single Loan (eg 1 loan of $500k against PPOR)
          2) Leveraging PPOR multiple split loans (5 loans of $100k each against PPOR)

          Option 1 is a complicated idea… unless you are happy to proportion the interest and fees paid towards investment

          Option 2, as the PPOR loan is split, each smaller repaid individual loans can be used for other activities. ie further investment or personal spending. As the smaller loan amount is used specifically for investment purposes, it is then tax deductible; no fancy proportion calculations needed.

          Happy to stand corrected for anybody else to explain better…

        • The Wololo Wombat on 22/03/2018 - 15:01

          @hoey888: I'm pretty sure this is not how I'm structured. I think all my properties are cross collateralised, so every new purchase is against the whole portfolio. Riskier, technically, but more powerful.

        • SlickMick on 23/03/2018 - 10:50

          @The Wololo Wombat:
          How is it more powerful?
          I didn't want to have to refinance if I needed to sell one property. After some harsh words and additional fees (I had to pay an application fee for each property), I insisted on separate mortgages.
          Turns out we've refinanced about every 5 years anyway, so was probably a waste of money.

      • born2reign on 23/03/2018 - 11:20

        The problem with this approach is that it realistically takes 20+ years to pay off a proper/decent mortgage, and that's assuming one has the discipline to reduce the standard 30 years to 20 years by diligently saving and paying PPOR down.

        In 20-30 years, you can miss out on 2-3 decent property cycles where any investment properties (including your PPOR), has the potential to double or triple in value (assuming they are in decent locations with strong underlying demand).

        For example, say 2 investment properties and 1 PPOR going up conservatively 500k in value each over 30 years and it seems like a far greater return (and easier) than diligently paying down only the PPOR by 300-500k during this time (with no investment properties)

  • brazen00 on 22/03/2018 - 13:08
    +1

    As with any leveraging there is an element of risk involved. You are very much at the mercy of the market in this strategy.

    • Oneforall on 22/03/2018 - 13:37

      Agreed!

      If the market fails you, you should have a backup plan ready.

      With banks tightening their criteria for lending, it is a more unlikely situation to be in for those who are purchasing property now.

      • brazen00 on 22/03/2018 - 14:10

        I'm not sure I follow. Tightening lending criteria => fewer buyers => market prices drop => less equity => this plan is more risky.

        What have I missed?

        • born2reign on 23/03/2018 - 11:24

          Tightened lending criteria doesn't mean nobody is buying and values drop.

          They are just far more selective with who they are lending to for the time being, the banks are still dying for your business and want to do a deal with you. They just have to take a breather for a moment and ensure that people who are getting new loans have the capacity to pay it back & absorb any interest rate rises in the coming 5 years or so.

          You can argue that it's now a safer environment, as anybody who is able to get a deal approved now clearly has sufficient savings/buffer/serviceability and not as likely to default on loan.

          In any case the tightened lender criteria is only a temporary situation until some heat comes out of the big two markets, once this happens it will be business as usual again and lending criteria will ease somewhat (not as easy as it was in the past, but not as tough as it is now).

  • The Wololo Wombat on 22/03/2018 - 13:38
    +1

    I've done this, current portfolio value 1.5mill…. which is like 1/2 a house in Sydney I guess, but good for someone in their 20s living in BNE!

    I've leveraged above 80% LVR (around 90%). If you stay with the same bank they consider the LMI you've paid in the past part of any future LMI considerations, so it's not so bad if you keep acquiring properties above 80% LVR….. Question you have to ask yourself is this - is the LMI payable going to be greater or less than the Capital Gains I would miss out on if I waited until my portfolio was <80% LVR. So far capital gains have FAR exceeded the LMI I've paid :) Worked for me.

    • The Wololo Wombat on 22/03/2018 - 13:44

      P.S trick is to ONLY by positively geared properties. That way, your income is not a barrier. You can also put granny flats on houses or set up dual living to turn negatively geared places in positively geared places.

      If you negatively gear, you will reach a limit on how big your portfolio will grow. 98% of houses are negatively geared! You've gotta look for those needles in the haystack!

      • Oneforall on 22/03/2018 - 13:54

        100% agree. By only purchasing negatively geared properties you will max out. However, you might need to positive gear by quite a bit as banks only consider you rental income at a discounted rate of 20-30%.

        • The Wololo Wombat on 22/03/2018 - 13:59

          ?? Not true for me at all. Not with NAB.

          I will add that it's not only which bank you speak to, but WHO you speak to at the bank. I suggested building a relationship with a mortgage broker who works at one of the big banks. It's strange advice I know, as you'd expect it'd be better to go with a mortgage broker who deals with a plethora of lenders, BUT one who works for the bank and who knows you personally, can help you out in ways that a generalist cannot (by the specialist access/knowledge of their bank's 'systems')

        • Oneforall on 22/03/2018 - 14:02

          When did you buy?

          Also you wouldn't know if they did in fact discount.

          Bank's will not explicitly state their calculations that resulted in your loan amount.

        • The Wololo Wombat on 22/03/2018 - 14:03

          @Oneforall: I've bought every year or two for the past 5 years. I literally sat down with my broker and they did the calculations in the system in front of me, my broker would have told me if that was the case…

        • Oneforall on 22/03/2018 - 14:05

          @The Wololo Wombat: Understood!

  • mysterytal on 22/03/2018 - 15:00

    Are you mad?

    You're gambling on a 100% Return on Investment in 2 years. You're putting in $100,000 and expect $200,000 equity in just 2 years.

    I can't see returns like that being sustainable in the long term.

    I wish you luck. If you're so sure of these investment returns then why not just put the deposit on a credit card and put everything you possibly can into property. In two years you can repay the credit card and have loads left over.

    • Oneforall on 22/03/2018 - 15:11

      haha this was a hypothetical for me to understand leveraging.

      That is not my actual portfolio.

  • D3AB on 22/03/2018 - 15:16

    This thread makes me cringe. I'm a home owner myself and I have many friends and family who are asset rich millionaires using these tactics. However, they had about a decade or two head start.

    But hearing some of the crap coming out of the royal commission makes me wonder if the whole deck of cards is gonna blow over for these people.
    When I used a broker I was honest about my serviceability because I want a roof over my family's head when the interest rates skyrocket and all these real estate gurus get taken to the cleaners. Paying the banks for insurance for their dodgy lending is dead money.

    Pay down debt and keep the cash under the mattress haha. We might need it soon.

  • jhmtaylor on 23/03/2018 - 09:09

    Do you realise that leverage worth both ways. It amplifiy's gains but also losses.

  • blawler05 on 23/03/2018 - 10:01

    On my recent property purchase I went 110% on it, because I had the equity on my first property.

    It was treated as a combined portfolio for the purpouse of LVR, and I was well under 80%. I think my LVR was 70%

    So its the total LVR you have, not what is on individual properties that matters.

  • Quantumcat on 23/03/2018 - 11:10

    I don't see how it could be possible to do what you plan - you can't even afford to pay your ppor loan fully (you said it is interest only) and now you want to double the potential mortgage payments (not to mention the potential increase when interest rates rise) - could you survive while it isn't rented? Sounds like suicide to me.

  • born2reign on 23/03/2018 - 15:19
    +2

    To calculate how much "usable equity" you have (assuming you can service the additional loan) to 80% LVR is simply:

    Valued amount (based on a conservative, independent bank valuation) x .8 (for 80% LVR) - current loan against the property.

    So in your example 1, value after 2 years = 600k, assuming interest only repayment and loan is still 400k, your usable equity (without paying LMI) is:

    600k x .80 = 480k - 400k = 80k equity.

    Previous LVR 400k / 600k = 66.7%
    New LVR after refinance = 480k / 600k = 80%

    The 80k (or part of it) would need to be used as a deposit + stamp duty + LMI (if applicable) + legal fees + bank fees + building and pest etc…

    I can tell by your tone in comments that you have a negative opinion of LMI, but LMI is one of the greatest things out there.

    You are paying roughly 10-15k per transaction to acquire the asset for 10% lower (90% LVR instead of 80%)

    For a standard 500k purchase, that's the difference between requiring 130k deposit (20% deposit + 6% in purchasing costs/fees as above) or requiring approx 90k deposit (10% deposit + 6% purchasing costs + 10k LMI).

    Paying 10k LMI to purchase that property now instead of diligently saving for an additional 40k deposit (in this example) probably shaves off 5 years of you saving every spare dollar of your after-tax income (assuming you can save 8k per annum minimum each year for the next 5 years) seems like too much effort for my liking.

    I've purchased 3 properties to date, paid LMI for 2 of them and I don't even remember paying it… it's chump change in the grand scheme of things, particularly if you are planning to buy multiple properties and hold them long term.

    The only thing I probably wouldn't ever recommend unless it was an amazing purchase with high yield + capital growth prospects is to pay LMI twice for the one purchase. For example, I wouldn't refinance a property to 90% LVR and pay LMI on the refinance, and then use that equity to purchase another property at 90% LVR and pay LMI for that loan as well.

    I was recently in this position where I was looking to purchase property #4 and the only way I could make the deal work was to refinance one property to 90% LVR to extract enough equity that I could use to purchase a new dual occupancy home at 90% LVR.. Even paying two sets of LMI and factoring in the new expected rents and capital growth and depreciation was very close from a mathematical point of view (in my own unique personal circumstances), it basically worked out to be -12k cashflow per annum but after tax it basically cancelled out with a +12k tax return (4x depreciation helps alot here), but ultimately decided not to proceed as I had no buffer room in case of an negative market event occurring or a couple of interest rate rises in succession etc., so have put off the purchase for now and will re-visit when the timing is better.

    Had I have been able to only pay LMI once, i.e refinance to 90% LVR to purchase at 80% LVR or refinanced to 80% LVR to purchase at 90% LVR, then it would have been a no brainer for me

    Good luck.

    • Oneforall on 25/03/2018 - 07:41

      Cheers for that.

      I am definitely not anti-LMI but all depends on the next property purchase price and the individual's personal circumstance.

  • mrtin on 24/03/2018 - 23:47
    +1

    Everyone is happy when markets are going well…

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