4LSUV - The 7 aspects of borrowing to invest in properties
At other avenues, we spoke about the 4LSUV of alternative lending, and this can somewhat relate property investments. So what are the 7 aspects, acronym "4LSUV"?
Unlimited Cash out
Ask yourself these questions:
Location - Where do you buy? Is the location you're buying compatible with borrowing policy common across the banks and lenders in the market? Why does it matter? Because you'll want to buy something that can always be in demand, in order to capitalize on the growth. And making it easier for the next person buying the property off you (regardless of how many years later it might or might not happen), is to enable the ease of borrowing in the location. Check out with your bankers or mortgage brokers on certain postcode restrictions policy.
LVR - What is LVR? It's a leverage ratio that works on the formula of dividing the loan amount by value of property. Essentially the lower the LVR the safer the borrowing is, vice versa the higher the riskier, especially if we enter a rate rising environment. Once again, check with your bankers and mortgage brokers on LVR restrictions, which can be subject to a lot of factors such as your income, your property and the location you're buying, etc.
Loan Term - how long do you need the loan for? It's common practice for most people to extend the loan term to the maximum possible horizon, and it does change the repayment amount hence affects your cash flow. However, it's recommended to actually tailor your loan term to your actual needs, bear in mind the longer the term the more interest costs you would have paid.
Loan Amount - how much do you need to borrow? The rule of thumb is to only borrow what you need. This is a critical factor as it affects multiple elements in the 4LSUV that we are talking about right now. And responsible borrowing means you don't borrow extended beyond your means. In saying that, borrowing can include costs of buying or investing, that can be stamp duty, moving costs, furniture, etc.
The above are the 4L - location, LVR, loan term and loan amount.
The next three elements to look out for are the SUV
Security type - the term "security" in the borrowing world is the item that is used to mortgage. In our property-backed lending scenario, it's obviously the property. So the security type means the type of property you're buying and borrowing against. In common we categorise property types into residential or commercial properties. Residentials investment is very common, lending policy can vary between residentials and commercials. And if you were to have a detailed breakdown of residentials investments - houses, townhouses, apartments, serviced apartments, dual keys, villa, etc. These are all different security types in the world of lending. Again, check with your banks and mortgage brokers as different security types do come with slightly different policies. And different types of investors seek different types of security to suit their investment goals and needs.
Unlimited cash out - if you already hold property, check if you can tap the equity of your existing property built over years, and release them as a "cash out" portion to cover the balance of purchase of your new investment. A benefit of doing this is to maximize tax deductions, consult professional accountants for more information. Not all banks and lenders have equal cash out policy. And not all properties have equal access to cash out. Yes, again check with specialists in the area - your mortgage brokers. One of the critical elements that affects cash out portion is valuation of your existing property, which leads us to the final part of 4LSUV - the V for valuation.
Valuation - when we talk about valuations we mean independent valuations by certified valuers that use recognized valuation methodology to assess the value of a property for mortgage purpose. This is the most recommended way as it can help investors and lenders have a very objective and independent view on the closest real value of the property. This will help all parties to avoid artificially manipulated or distorted figures to serve a purpose. Valuation on your existing property helps you tap into equity of your portfolio, while valuation on your target purchase helps you determine how much you can borrow against it. And it's a benchmark reference against your own market research, this is one part that no investors want to overlook. Residential or commercial properties valuation can vary, as rental yield could affect the outcome, and when it comes to development site or vacant land with permit to develop, that methodology could cary too, not mentioning more sophisticated valuation such as Gross Realisation Value.
In conclusion, speak to your bankers or mortgage brokers, and ask these questions. Mortgage brokers are usually free to work with as brokers are paid by banks and lenders, and do all the legwork of comparisons for borrowers. The value is immense and it can definitely assist property investors navigate the market, while we see hundreds of loan products available in the market. There is no one size fits all product.
Finally a disclaimer part, this serves only as educational piece of information. We live in a regulatory world that we abide the rules, and please consult accredited professionals as part of your decision making process. Information may vary at different times as policy and regulatory changes is liquid, it never stays exactly the same from time to time.
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