Banjo Smyth

Congratulations! You have almost completed your first property investment project. You have bought the property, renovated it, rented it out and now your ready to buy your next one (after a well earned rest of course). For this to become a reality you will probably need to get a revaluation on your investment property. The other option is to save for another deposit but in most cases this will take you a few years so it is much easier and quicker to refinance your investment property.

First of all you need to organize the bank to perform an investment property revaluation. The best time to do this is just before your tenants move into the property as it should be looking great after you ‘cheap renovations’ have been completed. It goes without saying that the better your property is presented the more favorable the investment property revaluation will be, so make sure you have the place looking great.

Once the investment property revaluation has been completed it is up to you to decide if you would like to refinance your investment property loan. Let me explain to you the advantages of this procedure.

Let’s pretend that you bought your property for $300,000 and after 2 months work it was revalued at $360,000 (NOTE: whilst these are very general figures they are very realistic if you have bought and renovated well). Let’s assume that you had a 90% loan so you paid a deposit of $30,000 and you have an interest only investment property loan of $270,000.

What you can now do is ask the bank to refinance your investment property at the new price of $360,000 and get access to 90% of the new investment property revaluation. What this means is that rather than having a loan of $270,000 (90% of $300,000) you now have access to a loan of 90% of $360,000 = $324,000.

So what’s the difference between $324,000 and $270,000 the payout figure of your old mortgage? $54,000. You now have access to $54,000 ‘whenever’ and for ‘whatever’ you would like without even selling your property.

The are two common questions that people normally ask when they hear about this investment property refinance strategy.

Q. Do you have to pay interest on the $54,000 if you don’t want to spend it?

A. Absolutely not, you only have to pay interest on it if you decide to spend the money.

Q. Can I use the money to buy anything, for instance a new car or a trip to Disney world?

A. Technically yes, but I definitely wouldn’t advise you not to do that - just yet.

The whole concept of this Investment Property Revaluation and Refinancing Strategy is that you use the equity of your asset to buy more assets NOT liabilities. $54,000 would be the perfect amount to use as a deposit (and legal costs) of your second investment property and that is exactly what successful investors have been doing for years and years.

If you’re a bit disappointed that you don’t get to buy your Porsche straight away then don’t worry, you can still buy your dream car but I would advise you to buy a couple of properties first. Then once you have started to create some serious equity I would insist that you treat yourself to some of life’s great luxuries. Who would have thought that refinancing your investment property could be so much fun? So what are you waiting for, its time to put the ‘5 R’s investment Property Strategy’ into action.

Renovate – Rent out – Revalue – Refinance and Repeat.

So now that you know what your basic plan is, it’s time to start getting a little serious and put some structure into your actions.  The first thing you need to do is to get ‘pre approval’ for a loan.  In other words you need to find a lender that suits your needs and get them to agree ‘in writing’ to lend you a certain amount of money to buy a Property.  I remember when I bought my first property feeling completely over my head when it came to getting my finance into place.  I had so many questions – most of which I managed to answer by trial and error.  I will try to give you a detailed overview of all the question, problems and answers that I have encountered with getting finance.

Q.  Why do I need to get ‘pre approval’ of a loan?

A. You don’t NEED to get pre approval but I highly recommend you DO for a number of reasons.
-  Pre-approval will let you to know EXACTLY how much your budget is and therefore allow you to exclude properties that are out of your price range.  This can save you valuable time.
-  If you are competing against other buyers then having ‘pre-approval’ will definitely give you a big head start and allow you to take advantage of Vendors who are looking for a quick sale.  Think about it – If you were the vendor and two people both offered you $350k for your house BUT one of them had ‘pre-approval’ whilst the other didn’t.  Who would you choose?  It’s a no brainer, there are even times when you offer $1k -$30k less than somebody else and they still choose you.  Why? Because for one reason or another  the vendor needs to sell straight away and they can’t wait to find out if the other offer will be approved.
- Keep STRESS to an absolute Minimum.  There is nothing worse than having your offer accepted and then having to wait for the bank to make their decision.  This is especially the case if you haven’t got a home loan before or are self employed.

Q.   Should I use a Mortgage Broker?

A. Yes, a good mortgage broker should save you thousands of dollars and help you get a loan easily.  If you are buying your first property then you will appreciate as much help as you can get.  Mortgage brokers deal with banks every single day and they should know how to get you a loan and more importantly WHAT loan to get.  Have you noticed that there are a million different loan options these days?  A good mortgage broker will know which one suits your situation and save you lots of time and money.  Always do your own research but if you find someone who you trust you should have no problems.  Best of all you don’t even have to pay them; the bank will do that on your behalf.  So really there is no reason NOT to use one.  Just remember find a Broker who you trust and get along with.

Q.  What sort of loan should I get, and what does Interest only mean?

A. The best person to advise you on this is your broker but generally speaking Investors only ever use Interest only loans.  What this means is that they will never own the house outright, instead they make smaller repayments that only cover the interest bill.  This can be a crazy idea to get your ‘head around’ at first but the reason is quite simple.  The lower your repayments are on your property the less restricted your cash flow is, therefore you have more excess money to help finance your next investment property.  The logical question is – but if you never pay off the house how can you make any money?  As we learnt in Chapter 1, you can still access the equity in your property without selling or completely paying off the house (see chapter 9 for more details).   It’s also worth mentioning that the Interest component of an Investment loan IS tax deductible whilst the principle repayments are NOT, just another reason why Professional investors always use Interest only loans.

Q.  Should I fix my Interest rate or leave it variable?

A. I have a basic rule or recommendation when it comes to this question.  When you first see banks raise their long term fixed rates you know it is time fix your loan.  Using this rule and some common sense you should be able to work out what’s best for you.

Q.  How much do I need to save for a deposit?

A. Once again it depends on your situation and circumstances.  A ‘normal’ property loan would include a 20% deposit but professional investors will always try and pay as little deposit as possible.  So, would I recommend getting a 95% loan?  With caution and common sense, yes I would - BUT every situation is different and I obviously wouldn’t recommend for someone who is earning $20,000 a year to get a 100% loan for a $500,000 property.  Use your common sense whilst doing everything possible to make it happen for you.  The worst feeling in the world is when you have saved a decent deposit but decide to wait another 6 months to save that extra little bit only to find out that house prices have risen and your deposit is now effectively worth less than it was 6 months ago.