by Greg Carroll Attitude Finance www.attitudefinance.com

If your long term strategy is to build a portfolio of investment property then it is important to have a long term finance strategy to match.

I often have investors come to me who have hit a brick wall with their lending and can't move forward to the next property. I usually find it is their current loan structure that is holding them back. Incorrect structuring usually results from short-term planning with a focus on completing the immediate purchase rather than asking "How will we do the next one?"

So today I will touch on a couple of points that you should consider in structuring your lending.

Understanding lender differences

As you acquire more property you also acquire more debt. In most cases lenders will be looking for evidence that you have the capacity to meet this increased commitment. Where you are acquiring high growth property that may be cashflow negative in the early stages this becomes more challenging. Each additional property will effectively eat into your income reducing the loan capacity.

As discussed in the last article each lender has their own method of assessing serviceability. This means the amount you can qualify for can vary significantly from lender to lender. Even between the major banks there can be significant variations. For example across a panel of over 30 lenders, a couple earning $75,000 per annum could potentially borrow anywhere from $308,879 to $522,124, based on the same information. Therefore you can actually rank your potential capacity across these lenders from lowest to highest.

In building a portfolio you would start by using the lower rank lenders first. As you reach capacity with these lenders you then place your next purchase through the next lowest lender where you can qualify. And so on moving up through the rankings.

Avoiding cross-securitization

Cross-securitization is where more than one property is used to secure a loan. If you have a property with a lender and buy another property, in most cases that lender will secure the new loan against both properties.

This can present a number of complications going forward:

• Firstly by linking all your properties together you have probably limited your loan options to that lender. As highlighted above if this lender has a more restrictive servicing test then your future investment plans may be slowed
• The lender will generally assess any future borrowing plans on the aggregate value of the properties. Let's say one of the properties experienced strong price growth but the other property was located in an area that was experiencing a down turn in value. The loss on one would cut into the gain on the other, reducing the amount of additional equity that could be released. If the properties were separated then you could take full advantage of the property with the gain to release additional equity and acquire further property.
• If you want to change things with either property or the loan structure it is likely to involve more costs in terms of additional documentation and valuation fees.

Having your properties separated gives you greater flexibility. It means if you need to make changes to your portfolio or your loans going forward you can do so without significant complication. If you find that there is a better option for you with another lender you can move one of your properties without disrupting the rest of your portfolio.

It must be remembered that these are general principals only and will not be practical or apply in all situations. The range of options available to you will depend on your specific situation.

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