How should I refinance IP?

[Jazza]

Hi everyone

I’ve been reading the PropertyTalk forums for a while and think this is possibly the best source of information from property investors in NZ, and now the world.
You’ll notice that this is my first post, not because I think I’m doing everything right (based on my question it will become completely obvious that I’m not), but because I’ve been busy reading all the other valid questions and answers. However, in the need for some advice I figured that this is the best place to get it.

A while back I bought my first investment property, and looking back it would be a quicker to tell you everything I did right, rather than everything I did wrong. I bought it with the theory of negative gearing being the be all and end all, and put enough of a deposit down to ensure that the rent payments covered the P&I loan. It’s currently owned in my name, but I’ve since set up an LAQC & Trust in lieu of more IP purchases that I want to structure correctly.

I’ll use round figures to illustrate my predicament. I bought the house a few years back at $215,000, and it currently has an outstanding loan of $80,000 which I have on P&I at 7.6%. The rent payments aren’t covering the loan payments. A recent valuation of the house has the value at $350,000, which goes to show that even idiots like me can’t lose on property in the long term.

The renewal date for this loan is in September and I want to get this IP set up with the correct structure once and for all. I know there is a lot of equity in this place that I can use to buy other places, but I’m finding it difficult to find cashflow positive places. So I don’t want to mortgage the place right up to 80% of its value when I’ll end up paying interest on a loan that I don’t need immediately. Although, I would like to be in the position to buy another IP should I find one, so having the money available is pretty important. As an aside, I have the $80,000 to pay off this loan leaving the house freehold, but I don’t think this is the best use of that money, right?

So my question is, how would this property be best financed so that I’m not paying a loan when I don’t need it, but there is the ability to use the equity in the property to buy another IP when I find one?

Sorry for the long question, hopefully it’s all clear.

Cheers,
Jarrad

[fudosan]

Hi Jarrad,

A warm welcome to PT.

how would this property be best financed so that I’m not paying a loan when I don’t need it, but there is the ability to use the equity in the property to buy another IP when I find one?

How about arranging your new loan into two parts: a fixed portion and a revolving credit facility that does not charge you interest when you do not use it? Subject to your serviceability, you may be able to obtain quite a large rc amount that'll allow you to offer cash for good buy.

[Daisy]

Definately get some revolving credit - they are brilliant facilities. I am planning to pay enough off mine so that I can use it as a deposit on my next property. That way I can go to any bank for the remainder of the mortgage. I just bought a second property and although I had heaps of equity in my first property the bank made me take the deposit as a personal overdraft (= high interest rates but thankfully only 6 weeks). In addition the mortgages have linked both the properties together somehow so I can't on paper pay one off. I didn't have much choice this time, but won't be doing it again that way!

[Julian]

Jazza,
Two things: If you only owe $80k, and it's on a 15 year P&I at 8% your weekly payments will only be $176.43 - are you suggesting your $350k house doesn't warrant rent at this level? Even allowing a couple of grand per year for expenses only adds $40 per week to this figure - still very cheap rental for a $350k house I would have thought.

Secondly, if you've got $80k in cash you have 20% deposit for $400k worth of buying - so why not get to it?

Julian

[wildwest]

Howdy Jazza

I suggest you sit down with a broker and discuss your refinancing options. There are so many deals out there at the moment, lenders are jumping through hoops to get deals.

Many lenders will even pay for the refinancing costs.

I agree with Julian. Your IP valued at $350k should definitely be returning more that $200 a week, unless most of the value is in the land.

There are lots of options for you, and it would be a good idea to get a broker to crunch some numbers for you.

[Jazza]

Thanks for your replies everyone

Fudosan/Daisy - The advice on the revolving credit loan is a good idea. I don't know much about them, but I'm sure there is a thread somewhere in PT that discusses them.

Julian - You are correct in assuming that based on the current rent I am getting, it won't be enough to cover an 80% mortgage on the $350K house. Hence why I am reluctant to up the mortgage. However, if I am able to buy other positive cashflow places with the equity in this place, then that should offset the amount I would be shelling out to supplement the mortgage. Which brings me to your second point - why I am not getting to it. I am constantly on the look out for positive cashflow places, I research the properties available in the papers and internet every day it seems, but I'm not able to find anything. I’m concentrating on a few areas out west of Auckland, as I’m fairly new to the game and I’m not a buy sight-unseen sort of person yet. Obviously there are +ve cashflow deals out there, as other people on PT have stated, which keeps me going. Unfortunately it’s just a bit slower than I would have liked.

Wildwest – I’ll definitely be going to a broker to discuss my mortgage options. I think a revolving credit facility as Fudosan/Daisy suggested is probably the way to go. Based on having some sort of requirement I can now go and see what my options are.

[wildwest]

Excellent Jazza

I'm out West Auckland too, so understand your situation.
It's always going to be tricky to find positive cash flow properties in Auckland, as property prices are risen whereas rent hasn't to the same degree.

Another thing to keep in mind is that revolving credit loans are on a floating rate, so at present this can be up to 1% higher than fixed rates. Factor that in when considering how much to place on revolving credit.

Also, you can now get amortising revolvers. These are transactional loans with a reducing limit. So you aren't tempted to keep borrowing up to the limit each month.

Good luck.

[fudosan]

I will not put the whole property in my rc facility. Instead, I'll use it as a tool to provide short term cash to secure a property. Once the property is bought, renovated and re-valuated, I'll use the new valuation to get a loan on the property, preferably on fixed term.

[Jazza]

Wildwest mentioned that RCs are based on floating rates which I was unaware of (thanks Wildwest). Based on that the idea of using it purely as a facility to secure a property is a good idea Fudosan, thanks for the advice. I haven't previously looked for properties to renovate/do-up, but based on the current diffilculty finding +ve cashflow places, I have been thinking seriously about this strategy. Having never done it before it will require some investigation, but it seems to be a good strategy in this sort of environment.

[drelly]

Hey Jarrad and welcome.

I suggest you have a chat with your bank. They are usually happy to give an approval for future borrowings over a period of 3/4 months. Doesn't cost you anything and you then have a budget. After you find something, you can go back and arrange the structure of the finance.

[Chemill]

Ok, Here's some refinancing options:

1) Just use the house as security and have 100% finance on your new investment property
2) Put 2nd mortgage on the old investment property when you require the money.
3) Flag the refinance and use your 80K to buy stuff untill you really, really need to refinance

The cashflow +ve investments are easier to create at the moment - add a bedroom to a house, buy an old crapper and renovate, or subdivide and build 2nd dwelling (or just add a minor dwelling), etc. You have to be creative, anything that's a straight +ve cashflow has loads of buyers lining up - get rid of your competition and look for problems that you can solve.

Chemill

[Jazza]

Thanks Chemill - regarding option 1, if I were to use the house as security and have 100% finance on a new IP, how many times am I able to do this? Considering there is quite a bit of equity in the house, would I be able to use it as security for several IP purchases? I guess if I used the same bank for the mortgages on the new IPs then it would be obvious to the bank, but would different banks like/allow this?

[SEIBU]

Well, there are two factors to consider: equity and serviceability. Theoretically, as long as you appear able to service the loans (and banks now take up to 90% rental income into consideration as part of the serviceability) you can continue to use the equity in your property/ies for future loans.

[NZMtgBroker]

Hi Jazza,
Your post raises interesting issues. If your LAQC is in your name and you are the only shareholder and director then transferring the property will probably do little than add to your legal bill. Also you need to watch the revolving credit option. If you draw the money for personal use then you have broken the tax deductablity cycle re purpose of funds.
You have plenty of equity and plenty of cash. You could buy another property by putting in this $80k and borrowing the rest from another lender. This will then ensure securities are not cross collateralized(one covers the other). You would still have sufficient leverage in your existing property to purchase again.
You have good equity which is a great start to a portfolio. You need a long term plan to determine when you will reach your borrowing limit based on income and who is the best option for you as lenders calculate income requirements differently.

[krispedersen]

Hi Jazza,

If you are looking at getting a few IP's one option that could suit your requirements is the Smart Investor product which Origin supply (Origin are a whole sale funder owned by ANZ). This allows you to channel the rents from your ip's back into your ppor thus rapidly reducing your principal. As the rents are not going towards your ip's the interest on these capatilises which increases the amount you can claim back as an expense. If you had quite a few ip's you could have the property that the funds are channeled into being paid off in only a few years.

You'd want to see if this kind of structure suits though because it doesn't offer the flexibility of the line of credit

Kris