Self manage portfolio, High Equity Low serviceability -difficulty getting a new Mge

[Anita]

Dear Team Need some advise We are mom and dad investors who own and manage several residential investment properties in Auckland/Waikato etc. My husband is a professional on salary, and I recently quit my salaried job ($60k pa) to manage better our property portfolio as it was very difficult with my salaried job managing the properties better etc as it needed more time and quality input. Ours is over 20 residential investment properties and we have very high equity and cash positivity to provide comparable salary for a PM as a permanent staff. We are needing to buy one particular property, and bank says that we do not have enough serviceability as it is only my husband who works on salary. Can our company (LTC) pay me a 'salary' , say $50k pa, and would this satisfy the bank as an income to raise the serviceability for a new mortgage. What are the pros and cons. And any other suggestions/ideas/thoughts at all on this line. Many Thanks in advance. Anita

[Wayne]

You could pay yourself $x to manage the properties so long as the salary is reasonable for the work done but whether that would satisfy the bank would be up to them.

All seems a little odd for a high equity/ cash positive situation.

Also why did you go for a LTC for cash positive when you have to pay tax for the company at the higher marginal tax rate (I assume your husband earns over $70k).

Are you a shareholder in the LTC or just your husband? There are rules around shareholder earnings that I am sure an accountant will pop up with.

[klauster]

LTC and cash-flow positive

Cashflow+ and LTC make little sense to me. Properties with income I would run in QC and engage services on contract, these expenses are tax deductible and you might get paid on PAYE, too.
The issue with banks is that they look at all loans related to you, and as shareholder, guarantor etc and the LVR should support I+P

Running a separate GST registered trading company that provides services to your investment properties or services or e.g. for my business would increase your accepted cash-flow.

[Green Fish]

Here's a revolutionary suggestion: Avoid the bank and use the equity in the Auckland properties. According to the experts, this procedure has been used successfully in the past - and I believe that the technical expression for it is "selling". (Hope I've spelt it right.)

[klauster]

Green Fish; Selling or Losing – What is the difference?
Life is not about money – it is about something you can enjoy. It might be a business – and using the sufficient cash-flow for a good life, I call it freedom. Are you free or in slavery of your job?

[Green Fish]

Don't follow the first question: She won't lose in the current Auckland market. If you're referring to future capital gains, that's a myth that's debunked every seven years or thereabouts.

I'm not sure about how much a good life this couple is enjoying. Instead of using the word "yield", the phrase was "cash positivity". That, I think, is derived from the phrase "cash flow positive" which was used by those people who used to run seminars, a few of whom aren't bankrupt. All that phrase means is that the rent covers the interest - at 5% - but not at 7%. And in making the calaculation, no account would have been taken of the 4% interest that would have been earned on the Auckland equity were it in the bank.

As for lifestyle, the wife has had to quit her job to drive between Auckland and Waikato dealing with tenants and fixing problems. She's hardly sitting back and smelling the roses.

[Bluekiwi]

You must be structured wrong, you should have done this before you quit.

Get valuations on all properties (the free ones like CV / bank desktop valuations).
Take that to your bank(s), get them to advance 80% of this value.
Have the extra funds sit in a fat R/C account, that you can access and do what you want with, ala new properties.
A line of credit if things go bad with a left field event.

If you have 20 houses with high equity, you should have more than 500k in your line of credit.
Use that to buy the house.
Hey if you buy well you can take the new RV to a different bank and get 80% of that which could be close to the purchase price.

Otherwise, just say you are taking your business to another bank, and they will quickly change there tune.

[Green Fish]

No-one has ever made money buying properties unless they have sold some. That's the whole reason to get in, and to get out. Any Auckland investor should be getting out, while the going's good.

[BigRedDog]

You must be structured wrong, you should have done this before you quit.

Get valuations on all properties (the free ones like CV / bank desktop valuations).
Take that to your bank(s), get them to advance 80% of this value.
Have the extra funds sit in a fat R/C account, that you can access and do what you want with, ala new properties.
A line of credit if things go bad with a left field event.

If you have 20 houses with high equity, you should have more than 500k in your line of credit.
Use that to buy the house.
Hey if you buy well you can take the new RV to a different bank and get 80% of that which could be close to the purchase price.

Otherwise, just say you are taking your business to another bank, and they will quickly change there tune.

Well said.

Anita... do you have an accountant?

[buxlo122]

Dear Team Need some advise We are mom and dad investors who own and manage several residential investment properties in Auckland/Waikato etc. My husband is a professional on salary, and I recently quit my salaried job ($60k pa) to manage better our property portfolio as it was very difficult with my salaried job managing the properties better etc as it needed more time and quality input. Ours is over 20 residential investment properties and we have very high equity and cash positivity to provide comparable salary for a PM as a permanent staff. We are needing to buy one particular property, and bank says that we do not have enough serviceability as it is only my husband who works on salary. Can our company (LTC) pay me a 'salary' , say $50k pa, and would this satisfy the bank as an income to raise the serviceability for a new mortgage. What are the pros and cons. And any other suggestions/ideas/thoughts at all on this line. Many Thanks in advance. Anita

20 properties - That is impressive

With that manny properties the bank will see you as rent reliant. This means they tighten there lending criteria as they see your as more risky.

I would talk to a mortgage broker. They will have more clout when negotiating or know of better opportunities to secure the mortgage.

You could pay yourself a salary but it would not change the serviceability unless you came across a naive bank manager.

[Craig Pope Mortgages]

Hi Anita
Regardless of how you are structured, the bank will be taking a holistic view across the board. So paying yourself a salary from your LTC (or other identity) probably wont make a difference as the income used to pay yourself a salary will probably have already been factored in.
As someone alluded to previously, there could be a 'rental reliance' factor now that you have quit a salaried job that was underpinning everything to start with. However a low LVR is a strength and it could be time to split the portfolio with different banks.
Getting valuations across the portfolio and gearing up to 80% seems/is correct in principle, however you still have top prove servicing, hence where a salary comes in handy! Remember too that some banks lower their maximum LVR threshold under 80% as you get more properties with them.
It would be interesting to see if hiring a property manager would have been more cost effective than quiting your job? It just depends on your long term strategy, if it was to keep growing your portfolio, then having your salary and hiring a property manager may have been a better strategy in the long run. Banks normally take into account 75% of the rental income, so using a property manager wouldn't have affected this calculation.
Cashflow is king as they say, especially when its coming from tenants and an employer. Though its always nice to keep a handle on your own portfolio, it's just knowing at what cost.
All the best!

[Green Fish]

If a lending decision for a couple with 20 properties comes down to the loss of the wife's 50k pa job, what does that tell you? They're mortgaged to the hilt.

Anita: You and your husband should put all your Auckland properties on the market, immediately. If not, bankruptcy beckons. Want proof? Check out postings on this website from mid-2007.

[buxlo122]

If a lending decision for a couple with 20 properties comes down to the loss of the wife's 50k pa job, what does that tell you? They're mortgaged to the hilt.

Anita: You and your husband should put all your Auckland properties on the market, immediately. If not, bankruptcy beckons. Want proof? Check out postings on this website from mid-2007.

Green Fish sounds like you are bit of a Bear.

You could also find some negative posts call for the end of the boom back in 2004 too.

[Green Fish]

There's a lot of good information in the archives. Everyone remembers October 2008, but the bust actually started a year before, with the 2007 "Credit Crunch". That's when we had the record listings, followed by a sharp drop in turnover.

For 2013, we now have the record listings, so the figure to look at is Barfoots' turnover. Trouble is, you can't sell real estate with two clicks of a mouse.

[speights boy]

I'm not as much of a bear as GF.
Market slowdowns and corrections are needed the make the cycle work.
They remind people about the risks of being highly leveraged without other funding or liquid assets to fall back on; - which appears to be what he is saying.
I do agree with the idea of having something to sell quickly is often the best mortgage insurance policy one can have.




I think, as far as the sharemarket goes it is getting 'thrilling'
Like property it is getting harder to find good investments.
When the correction occurs it will affect most markets; which will, as is often the case, simply transfer wealth from the highly indebted to those who have something to fall back on.