Adding Value to Re-Finance

[Invester Chick]

Hi there,
About six months ago I had my investment property valued so that I could gain finance to buy another property, this came back at 175K which was suffient for me to be able to purchase another property, which I did. (I was still working full time at this stage)

I am wondering... if I were to do some minor improvements to the original property to improve it's percieved value (painting, curtains, carpet, new doors, stain the deck etc), and then had another valuation done, would I be able to use the increase in value to buy another property (asuming it had gone up in value). I have recently become a stay at home mum after having our first baby (weather this would have a bearing on borrowing, with me not working anymore, assume so).

I'm keen to keep momentum going with regards to my investing, but a little difficult now that I am not working. Would I even be able to get a mortgage even if the original property had gone up in value and if the possible new property was cashflow +??? Not sure how banks work out the lending etc, just wondering what my options may be for moving ahead???

Look forward to to hearing your thoughts...

[tpr2]

Not working will make things tough and now you have a dependent so your borrowing capacity will have reduced significantly.

Depending on your partners situation though you may still have sufficient borrowing capacity to get into another property.

[Harvey]

It also depends on what access you have to the property. If currently tenanted doing such renovations can be tricky. Also you have to be careful not to over captialise.

I would suggest trying to do those things in-between tenants. Try and increase cashflow then get the property revalued.

[spaceman]

Soooooo.......you think a registered valuer with years of training and experience will value the property has higher just because you've done some minor maintenance??????

IMHO it doesn't work that way .......sure spruce up might help you sell it ......but I don't think it adds any value, unless of course the place was seriously in need of it. But then again that would have been reflected in the original valuation if this was the case. ie: it would have been below market value and you would simple restore it to market value...... splitting hairs maybe but not really increasing the value in my book.

Good luck

Cheers
Spaceman

[Invester Chick]

Thanks for the feedback. Yes I would be able to get access to the property to do these minor improvments. It is currently tenanted, but the tenants are very obliging and are even prepared to chip in and help...(could be a bad thing??) I have recently increased the rent as well. The property is in need of this work...I was also considering adding a garage (as there is none), would that add value, or no more than what I would pay for the garage?

Spaceman...Thanks for your thoughts. What does IMHO mean?? I see your point about the valuer with years of experience etc... I did wonder that. Can you offer any other suggestions about how I might continue investing, givin my current situation??? Just putting it out there, I know the obvious is that I am at a stand still until I go back to work and have an income.

[WGN ex-property manager]

A well executed cosmetic reno can easily add more value than is cost to do , especially if you do some or all of the work yourself.

However I'm not sure this will solve your problem.

If the problem is "I can't borrow money to buy my next investment", you need to ask your bank or broker "Why not"?.

Do you have an equity problem (ie too high a Loan to Value ratio), which can be fixed by adding value?
Or, do you have a debt servicing problem, which needs to be fixed by increasing rents and or getting a job (or partner getting a higher paid job).

Given that you recently stopped work and became a stay at home mum I'd guess that the block to borrowing more is debt servicing, rather than (or maybe ass well as) equity.

Any "work from home" job you do needs to be on a a wage or salary basis for the banks to give you any credit in their debt servicing calculations. Commission or owner operated businesses would count for little or nothing until you can show the bank 2 years books with a healthy profit.

[Invester Chick]

Thanks Robin...
Yes, my problem is debt servicing, not so much an equity problem. I am on my own with this, as my partner and I put our incomes seperatly into different ventures (for me its property, for my partner its the farm). So I can't take his income into account with debt servicing, we prefur to keep it this way. Its becoming obvious what I need to do to be able to keep investing...thank you for your feedback.

[Harvey]

IMHO means in my humble opinon

Alternative definitions can be:

1)Supposedly "in my humble opinion", this is always said before someone makes an asshole comment that is not at all humble. Much like "no offense" precedes an offensive comment.

2)Used in net-speak it's mainly used to attempt to show that the opinion stated was either godly, true, or was stated by someone with humility. All three of those reasons are what would be simply known as bullshit.

[Invester Chick]

Thanks for clarifying Harvey.

[WGN ex-property manager]

Thanks Robin...
Yes, my problem is debt servicing, not so much an equity problem. I am on my own with this, as my partner and I put our incomes seperatly into different ventures (for me its property, for my partner its the farm). So I can't take his income into account with debt servicing, we prefur to keep it this way. Its becoming obvious what I need to do to be able to keep investing...thank you for your feedback.

Just because your partners income is channeled into the farm doesn't mean it's not useful to show a bank to demonstrate good ability to service debt.

The bank will be modelling your cash-flow in a very very conservative way, so even if the bank think you're way into the "red zone high risk area" for debt servicing, your cash-flow could still be positive in real life.

So you show the bank your partners income on your mortgage application, secure in the knowledge that you'll never actually put any of it into paying the mortgage (that's what the rent is for) unless something goes horribly wrong (in which case your partner may well divert some income into the property portfolio regardless of the banks debt servicing numbers, just so you don't loose the portfolio).

Example:


Mrs "Maxed out" want to buy another investment property for $400K, 100% financed at 6.2% mortgage rate, but she's already at the limit for debt servicing in the eyes of the bank. The numbers:

$400K debt @ 6.2% interest only = $24.8k pa,

The rent will be $700pw @ 50 weeks per year occupancy, so the rent will be $35000 pa. Minus costs (rates $2K, insurance $1K, Maintenance $2K) = $30000. So in the real world the property will be cash-flow positive by $5200 per year.

BUT in paranoid bank world it all looks different:
The actual interest rate is 6.2%, but the bank will model this at, say 9% interest, just in case. So they want to see the ability to repay $36K interest.

The bank will then assume that only 75% of the rent is available for debt servicing (regardless of the truth on the ground), so they assume an available rent of just $26250. So in bank world, the property looks cash negative by $9750pa.

So they want to see income from another source (ideally a salary), not committed to any other compulsory spend (such as debt repayments, rent on your home etc) to cover $9750.

The bad news is that for salaries they assume only about 35% is available for debt servicing (you'll spend the rest on beer and cheap gadgets from Harvey Norman's of course), so they'll actually want to see a salary of about $30K pa to allow you to buy your $5200 cashflow positive property!

YOU know you'll never put a cent of the $30K salary into the property unless you have a major disaster, but THEY want to see that the salary exists. If this $30K salary is your partners, and he wants to put it into the farm in real life then THE BANK DON'T NEED TO KNOW. They just need the reassurance that the salary is there. They do not need a promise that you will use it to pay the mortgage every month, as long as the mortgage gets paid somehow (eg by the rent).

Hope this helps clarify. If in doubt consult a good mortgage broker.

[Invester Chick]

Thank you for putting that in a way that I can understand Robin. I knew banks were conservative, and now I understand a little more how they calculate debt servicing. What if my partner already services a sizeable mortgage (for the farm) with his income??? Will MY bank need to know the details of this???

[WGN ex-property manager]

Yes they will. If you're claiming his income as "ability to service debt" then they will need a full picture of his liabilities and financial obligations to work out how much of it can be assumed usable to service "their" debt.

[Invester Chick]

I think I would end up in the same position if I were to consider my partner's income, as after he has paid his mortgages there is little left over. Enough for our living exp and thats about it.

[WGN ex-property manager]

Still worth running it past a good mortgage broker. It won't cost you anything to find out.