The secret sauce of any successful property investor is leverage. What’s crucial though is establishing a loan structure the provides flexibility, tax efficiency, easy administration and collateral in stand-alone positions. Inefficient structures are usually only beneficial to the lender. And when it comes time to try and untangle a series of cross-collateralised properties it can get tricky.
One way to tackle this is through refinancing your existing portfolio on a step-by-step basis. Depending on the situation changing or splitting a few loans will most likely be involved and often professional packages can be one way that will allow you to do this. There are numerous ways to approach it and the direction should be steered towards achieving the desired end result.
For an efficient loan structure take these six factors into account:
- Too much security – there is no benefit to you as an investor by providing more security than a lender needs
- Lending capacity – can vary greatly due to lending policy and serviceability requirements. Holding multiple loans with the one lender may also mean that you’ll reach a debt ceiling with the lender preventing you from borrowing further funds
- Mixing business with pleasure – the problem here is that the lender technically knows too much. It can be a convenient and hassle free relationship until you need to borrow and the line of questioning from the assessment team becomes more rigorous
- Not staggering your fixed rate expiries – there are times when it’s worth fixing a rate and its good management to stagger the expiration’s if you fix multiple facilities. Reason being is to ensure there is an appropriate amount of flexibility across the portfolio
- Not maximising the tax deductibility at the start – you cannot increase the loan later on, as the purpose will change affecting the overall tax deductibility. You need to maximise this from the start
- Not preparing for change – change is a constant therefore, try and prevent rigid arrangement. Things change and you need to be prepared for what life throws at you. Maintaining a good level of flexibility will alleviate pressure and free up cash if, it becomes a necessity! A flexible structure will also allow you to pull cash if needed be to pull the opportunistic trigger.
As lending policy continues to get tweaked it’s imperative to seek good professional advice when it comes to your lending positions. Leverage is the secret sauce and when used effectively it does become a powerful tool in wealth generation.
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