Investment Property Insurance

Written by Investment-Mortgages on February 8, 2010 — Leave a Comment

Investment Property Insurance

When it comes to your investment strategy there is nothing more important than protecting your assets you have worked so hard to acquire and build up.

Insurance is a vital part of your asset protection however for many it is neglected and has terrible consequences.

Insurance is a real financial pain as it is not cheap when you may be starting out with your first investment property. It’s hard to justify the cost when there is a very low chance you will ever need to claim. Depending on your local taxation regulations (speak with your qualified tax professional) it may be tax deductible though which helps.

There are two types of insurance that would apply to an investment property.

-Building and Landlords.

-Personal Insurance (Life, Trauma, TPD, Income).

Building and Landlords Insurance

Building insurance covers total building loss/replacement as to agreed policy amount.

This is usually required for any mortgage that a bank holds over your property. They would want to see the valid certificate of insurance before settlement.

Landlords insurance on your investment property is optional however highly recommended. It covers two main things -loss of income and tenant damage.

Loss of rent cover for up to 12 months if property become unfit for letting due to an insurable event.

Rent default by tenant cover, Cover for theft, malicious acts or vandalism by tenants

$20 million legal liability cover for injuries to people, or damage to property

Electric motor burn out and power surges

Accidental glass breakage

Most insurers also have pay by the month premiums at no extra cost.

By needing building insurance to satisfy the banks lending, you have covered the major risk -losing everything (your capital).

The second risk is cash flow and outgoings -Your rent and property damage.

If you lose rent you lose cash flow, if your property gets damaged, it can dramatically increase your outgoings and temporarily halt your cash flow.

Now the third and not thought of risk is being sued by a tenant for accidental injury or the like. This is uncommon however in our litigated world lawyers love this kind of thing (court battles, court proceedings and suing people in general).

Being sued because your tenant tripped over a wet and twisted board on your balcony because the gutter was leaking over the top of it is an all too real circumstance which could leave you seeking your lawyers protection in court. Having legal liability included in landlords insurance allows you to sleep at night.

Having insurance does however lift your game as a professional property investor, as the insurance companies that are billion dollar risk insurers will only insure events that are actual accidents. They will investigate as to whether or not you for-filled your policy requirements and provided a fit and safe dwelling for your tenants to live in.

Gone are the days of just “getting in some tenants”. You have to run it like a business and ensure it has all the makings of a well run and maintained house fit for tenants that lives up to the tenancy requirements. Leaving that balcony railing with some termite damage might not seem like a big deal however who would be sued if your tenant fell off the balcony because of that lack of maintenance. I’m sure you would also be thinking about how thorough your managers are now too. As some insurers also require regular inspections as to maintain the required level of maintenance.

Personal Insurance

Personal Insurance is not everyone’s cup of tea however if passing on debt free assets to your siblings, next of kin or desired charity is a priority on your unfortunate passing then you will need personal insurance.

A burden many face is being laden with their next of kin debt upon their untimely death or passing. Having debt is sometimes essential to buying investment property however passing this on to an unready sibling or family member could be a horrifying ordeal.

Also most children do not fully realise that if their parents insure their lives for the full amount of debt owing they could get a free hold property portfolio.

Personal insurance usually covers two things.

-Life, Trauma and TPD Cover

-Income Protection.

Life, Trauma and TPD cover is about insurance covering accidents/circumstances which cause death (life cover), a serious health issue like cancer and illnesses that impede your ability to work for a certain time (trauma cover) or a serious impairment that would take away your ability to ever work again (TPD cover).

These all are usually paid out by a lump sum amount.

Income Protection Insurance cover is a cash flow protection method to ensure you can fund your outgoings of daily life and the possible shortfalls of your property portfolio.

Most would view this is a must have if you need your regular income to pay the bills etc.

Living with out your income could be a dire situation and the last thing you want is to start selling up your assets to pay short-term bills.

This sort of cover is by regular payments for a predetermined time period with the intention of you recovering and retaining your income.

Insurance is now a necessary evil and we have to accept the cost and ensure we for-fill our obligations to help in a smooth flowing high growth property portfolio.

Do you have a question with insurance? Contact us HERE and find the answer.

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Interest Only Loans

Written by Investment-Mortgages on October 5, 2009 — Leave a Comment

Is An Interest Only Loan For You?

Is a principal and interest loan better for you?

This depends a lot on your situation and probably more on what you think the property market is going to do if you are an investor.

Interest only loans have significant lower repayments as they have no principal amount attached. This alone provides a great incentive for investors as this frees up a lot of essential cash flow. It can be the difference of getting a deal across the line or not for a lot of people.

Example: $300,000 loan. Interest only of 8% = $24,000 P/A in payments. (300,000 x 8%)

$300,000 loan Principal & Interest= $27,780 P/A in Payments

The interest only repayments are $3780 P/A lower which equates to over $72 P/W.

This could be a fair amount for a first homeowner or first time investor.

Even some homeowners utilise these types of loans to make the most of lower repayments however the thought of not actually paying any of your loan down is a hard concept to grasp.

Investors however realise that the price of financing today is always cheaper in the future as the trusty factor of inflation actually reduces the size of your loan at the rate of inflation. You would hope you property goes up with inflation though to make it work!

Interest only loans have been around for over 90 years and are a great finance strategy if the asset is appreciating (going up in value) and the interest rate is still fairly low. That way the growth far out ways the cost of paying the loan and the loan actually decreasing.

The second and probably more popular reason for utilising interest only loans is that (subject to your specific taxation requirements) the interest component of an income producing assets loan is tax deductible.

So if you had a principal and interest loan for an investment property the interest component is tax deductible. If it was an interest only loan, the whole repayment is tax deductible. This helps servicing (negative gearing: see earlier post) for sure come tax time!

Everyone’s situation is very different and seeking great accounting advice (from property specific accountants) is recommended to ensure you get it right first time.

Need a quote or have a lending question? Contact us HERE and we will

Help you out.

Posted in Loans | Tagged home loan, home loans, Interest Rates, investment, investment mortgages, investments, loan, Loans, money, mortgage, mortgage calculator, mortgage choice, mortgages, real estate

Apartment Lending

Written by Investment-Mortgages on September 2, 2009 — 2 Comments

Lending For Small Apartments

There is the old question that comes up every now and then, -

“Should I buy that studio apartment?”

They are usually marketed with a very attractive rental return however that’s sometimes where the good news ends.

Here is some of the “noise” that surrounds them-: “They won’t lend against small inner-city studio apartments, You won’t get approval if the floor size is less than 50 sqm, Student apartments are not an option, Some lenders won’t lend for apartments in large complexes, Hotel or motel conversions are no good, The location of the unit within the complex is important

While being just “noise” some of these points are somewhat valid.

The recent credit crisis has put the brakes on a lot of lending overall and small apartments have not been shielded from this

The biggest hurdle is usually lender’s mortgage insurance (LMI).

They are the ones imposing all the restrictions that are passed onto the bank.

If you require LMI this is where the hard work starts

Hurdles:

Title. Strata/stratum title is normally acceptable, as are ‘group’ titles. Mortgage insurers aren’t usually afraid of company title and will lend, though they may lower their LVR.

Size: While this might not be important to the lender, you can expect the mortgage insurer to have minimum limits on the floor space. Always aim to avoid any apartments with a floor space of less than 50 sqm. It must be 50 sqm of actual ‘living area’ (not balconies and car space etc). In special cases this may be stretched down to 40 sqm but the property would have to be in a “blue-chip capital city area”. The Bank may not impose a floor-space limit but notes that LMI might fail the application for that very reason.

Location in the development/complex. One important factor may be whether it’s in a good location in the development or if it’s at the dark shaded noisy rear corner of the complex.

Changing from commercial or industrial to residential. Hotel conversions, holiday lettings and serviced apartments (commercial) lettings rather than residential units fall under completely different lending requirements (possibly commercial). So if they are being converted you may not get finance until the conversion is complete providing it meets all council’s ordinances and general lenders’ requirements, most lenders will proceed but there may be a reduced LVR or restrictions on LMI. The biggest reason is you’re reliant upon the performance of the management company looking after the apartments.

Number of apartments in a development: There might be a limit on the number of apartments within the one development that you can put up for mortgage insurance.

The bank may limit lending on six apartments in any one development or limit lending for no more than 25 per cent of a development

Here are some extras hoops you may have to jump through for finance:

-More thorough valuation inspections and reports.

-A lower LVR (70 to 80 per cent max, though some, usually non-bank lenders, only go to 60 per cent) –a higher deposit required.

-Reduced maximum mortgage amount.

-More expensive LMI if even available.

-Reduced consideration of the rental income to allow for longer vacancies.

-A call for additional or cross-collateral security(see earlier post here).

-Downright refusal of application at worst!

The fundamentals of real estate remain important, not necessarily the fact that there’s a studio apartment. There are plenty of studio apartments that have doubled their value over 10 years. The unit my have great rental returns low vacancy and be located very well so a bit of hard work and research at the start may pay off long term!

Have a lending question? Contact Us Here and let us help you.

Dont Cross Collateralise

Written by Investment-Mortgages on September 1, 2009 — 5 Comments

Why not to cross collateralise your investment loans

Cross collateralisation occurs when the bank uses the security for one loan to secure another loan. What you want to aim for is to have any property you own, investment or otherwise, financed with free standing finance

How cross collateralisation Can It Help You (rarely).

For property investors just starting out, using your home equity can help you get your first investment property most easily. The advantage of using cross collateralisation is that you can borrow 100% or more of the price of your next property plus the costs of purchasing (usually about 5% – 6%).

The reasons for not to cross collateralise are numerous and extremely important.

Here are our top ten to help your finance strategies for moving forward and decreasing your risk.

1) The banks decrease your overall servicing/lending ability the more loans you have. The cost of one rental vacancy may be able to be absorbed, however three rentals vacant would be crippling. Your LVR’s may still be conservative however its higher risk to the banks the more you have.

2) They could force you to sell down some of your portfolio if unforeseen circumstances arose as to maintain their computer generated margins and formulas. Refinancing or a line of credit might be the best short-term option, however the one bank that controls everything might not make this available.

3) You’re not necessarily having available to you the most competitive products on the market. Terms of the loan and interest rates are going to be hard to negotiate if they all ready have you in the door. They may even limit you to principal and interest only to pay down some of the debt. Taking your business elsewhere may motivate them to keep you through renegotiations though!

4) You might not be able to utilize great products like low-documentation or no-documentation if your bank knows through your current loans that you have a paying day job that limits your ability to borrow/service more debt.

5) In the unlikely event that someone sues you, if you have all of your properties crossed (especially with the one lenders) this could leave the door wide open & you could lose the lot especially if you have a lot of overall equity. Not many people like to have all of their properties/loans with the one bank. This is why it is always best to speak with an accountant & solicitor to make sure you are covered in case something like this happens.

6) If you want to realize some increased equity when properties have grown in value you need to have your whole portfolio revalued (multiple valuations instead of one, again an additional and unnecessary cost).

7) When you sell a property in a cross-collateralised structure you may not see any of the funds as the bank may request some or all of it to go back in against the existing loans to strengthen their position. They don’t need your permission either. Picture this you’re releasing one of your properties for an opportunity or worse still a bind, and the bank deducts funds to strengthen their position. Where would that leave you? We have seen this happen to some very asset strong and successful property investors. Answer given, Bank Policy!

8) When you sell a property you have to resign all of the existing mortgages. Extra unnecessary paperwork. You can’t simply just sell the property and release the title to the vendor – 9 times out of 10 you need to re-value ALL properties that the secured against the property your releasing which means extra valuation fees, time & the existing loans usually have to be kept UNDER 80% LVR (or sometimes 60% LVR if its LO DOC)

9) Buying across state boarders you are subject to mortgage document stamp duty of that state, this in itself is OK, but when you have other properties as security for the purchase, regardless of the state they are in you may have to pay the mortgage document stamp duty on the entire loan amount, rather than just on your purchase price. This could triple your stamp duty costs!

10) The biggest disadvantage of crossing your collateralisation is that it ties you to one financial institution. It is so much harder to move banks, if you no longer like or agree with their service or lack of. Control- The one bank can literally have control over your entire portfolio. You wouldn’t hand control over to your hairdresser, so why would you to a bank with no interest in your property goals and aspirations?

Its not to say your current bank is bad, they may have served you well for years, but you now have to ensure your best interests are looked after here and your current bank may not be able or willing to meet your needs going forward while still ensuring their own profit margins.

Banks will naturally assume that you are going to cross collateralise your home to purchase your investment property. By asking that the equity you have in your home or other real assets be made available to you as a LINE OF CREDIT you are put in a much more flexible position.

Remember cross collateralisation(Especially with negative Gearing)can bring your real estate investment financing plans to a standstill.

If you have any questions about your current loans, possible new loans or just want a friendly chat Contact Us Here.

Posted in Loans | Tagged budget, home loan, home loans, Interest Rates, investment, investment mortgages, investments, loan, Loans, management, money, mortgage, mortgage calculator, mortgage choice, mortgages, property, real estate

Negative Gearing

Written by Investment-Mortgages on August 28, 2009 — 4 Comments

The Benefits and Downfalls of Negative Gearing

One of the biggest hurdles in purchasing the first investment property is getting your head around the fact it may be “losing” money every week. What is called negative gearing is the fact the cash flow of the property is negative-Its holding costs are more than the rental income. This may be the first and biggest stopping point for many.

However it’s simply the nothing more than the cost of doing business short term. If your $300,000 property was to double in value in ten years (assuming the traditional cycle time), would you look back and stress about the $5000 in the first year, $4000 in the second year it may have cost you initially? I’m in no way saying that it is insignificant because it is very when it comes straight out of your wages or income!!

If you worked out how much per week your investment property grew in value per week by doubling every ten years I’m sure it would far out way the short term negative gearing.

There is really only one benefit to negative gearing-Tax deductions.

An income-producing asset (rented investment property) that has negative cash flow is allowed tax deductions that can be passed on to your personal tax return.

Example

$300k Property

Expenses (p/a)

Loan Interest = $21,000

Rates =$2,100

Management=$1,165

Insurance =$600

Maintenance =$500

Accounting =$400

Total =$25,765

Income

Rent =$17,160

Shortfall =$8,605 =$165 per week

Property Doubles in ten years =$576 per week

(600k – 300k = 300k / ten years/52 weeks)

So by thinking short term is not really that beneficial in term s of building up a sizable portfolio. Managing your cash flow from day one when its negatively geared can only teach you good habits on how to budget well and will set you in good stead for in time when the rent does double and the cash flow is in fact positive! You are only buying time in the market to hold your hopefully appreciating asset.

Still doesn’t seem like you can afford it? Just think- What else do I spend my money on that goes up in time with being able to borrow with such great leverage like investment property?

Credit cards? Holidays? Cars? Clothes?

Need help calculating your borrowing cash flow? Contact Us Here for your help.

Posted in Mindset | Tagged home loan, home loans, Interest Rates, investment, investment mortgages, investments, loan, Loans, money, mortgage, mortgage calculator, mortgage choice, mortgages, real estate