Cross collateralisation – what is it and why is it bad?

Cross collateralisation is one of the most common mistakes made by property investors. But what is it and why should it be avoided?

Cross collateralisation is when an investor uses more than one property as security for a loan.

For example, let’s say Jane Doe wants to purchase a $400,000 investment property.

Jane currently has:

• A house worth $600,000
• $200,000 remaining on her mortgage with Lender A
• No deposit or cash

Given the amount of equity in Jane’s house, she can approach her lender (Lender A) and secure the entire $400,000 needed to buy an investment property.

Following the transaction and acquisition, Jane will have $1 million worth of property and $600,000 worth of debt.

What’s more, with an 80% loan-to-value ratio, Jane will also have at least another $200,000 of equity in her properties.

If Jane wants to utilise this equity to purchase another investment property, she can approach Lender A for another loan. However, depending on her circumstances and the lender’s policies at the time, they may reject another loan application from her.

No big deal, right? Jane can always approach another lender?

Actually, it’s not that simple.

In reality, it’s unlikely that Jane would secure a loan from another lender (Lender B) because her original lender (Lender A) would have taken first mortgage security against both her home and her investment property.

Generally, lenders won’t issue second mortgages because they aren’t in control and can’t hold existing property titles as security. Given this, it’s likely Lender B would reject a loan to Jane unless all properties were refinanced to Lender B.

If an investor has purchased several properties using cross collateralisation, their ability to borrow from their lender becomes increasingly harder.

Savvy investors know that it is beneficial to spread their borrowings among different lenders.

In the above example there is a better way to secure all the finance needed for the $400,000 investment property.

What Jane should have done is approached Lender A for a home equity loan of $280,000 – if she has good credit, and she can service the loan, there is no reason why she shouldn’t have this approved.

Using $80,000 of the home equity loan as a deposit, Jane can approach Lender B to loan the remaining $320,000 needed to buy the investment property.

Jane now has $1 million worth of property and two lenders who both only control one of her properties.

She also has $200,000 remaining of her home equity loan, with which she can use to purchase more properties, if desired.

Another major downfall of cross collateralisation occurs if you want to sell one, or more, of your properties.

This is because you are essentially changing the terms of your contract with your lender.

By selling one property you are taking it away from your lender as security and changing your loan-to-value ratio.

Subsequently, your lender may require you to reapply for your loans in order to release the property you want to sell. They can also ask you for revaluations on your remaining properties, which are completed at your cost.

The lender can even take proceeds from the sale of your property, or deem that you no longer meet their lending requirements and force you to sell more properties than you intended.

By choosing not to cross collateralise, you will only ever be required to repay the loan that the property is secured against.

Furthermore, having separate lenders for separate properties will give you more options should you choose to refinance.

Although the idea of cross collateralisation can sound confusing, it’s important to remember to only offer the property you are purchasing as security.

6 reasons why good properties are sold below value

The notion of undervalued property might seem inconceivable – why would anyone sell their most expensive asset for less than its worth? However there are many reasons why people sell property for below market value.

Acquiring a good property for below market value can deliver huge financial windfalls and even help investors buy their next property sooner.

Owner-occupiers and investors, alike, sell property for less than it’s worth for a number of reasons.

Before listing these, though, it is worth noting.

While undervalued properties can be found from time-to-time, in the large majority of cases if the price of a property seems too good to be true, there is generally a reason.

Subsequently, it pays to complete adequate research because the price may have been lowered for a number of reasons, such as delinquent neighbours, structural issues with the house or noise factors, among others.

However, here are six reasons why good properties can be sold for below market value.

1. Downsizing: If older owner-occupiers want to downsize, or move into a retirement home, in many cases price won’t be a priority. The owner may prefer a quick sale and therefore advertise the property at a lower price.
2. Presentation: In soft markets, when housing stock is high, buyers can be more selective and will generally prefer renovated properties. Savvy investors can purchase older homes that will demand higher prices after minor and cost effective upgrades are completed.
3. Divorce: Similar to the downsizing situation, when a couple is separating, the price of the property may not be a priority. Rather the owners may require a quick sale.
4. Uninformed selling agents: If an agent isn’t familiar with the suburb they may under-price the property. Additionally, the agent may not be familiar with the particular zoning of the property. For example, a selling agent may advertise the property as a potential duplex development, however planning rules may allow a triplex, or bigger.
5. Financial distress: The owners of the property may be under financial pressure. They may have had a bad tenant that hasn’t paid rent or amassed too much personal debt to meet mortgage repayments.
6. Difficult tenants: Existing tenants may be difficult and only provide limited access to the property for home opens. This can discourage potential buyers, which means less competition and the chance of a lower price.

It’s certainly more important to buy a property with the best long term growth prospects rather than focussing on the best “deal”, as that initial saving can soon disappear if the property performs poorly. You should always focus on the better long term investment. However in a softer market there are opportunities to get great properties and get a little more off the price.

Shopping centre redevelopment to complete leafy suburb

A $600 million redevelopment of a major shopping centre is set to complete the picture for this family-friendly suburb.

Carine is located about 13 kilometres north west of Perth city and features predominately low-density residential housing, which comprises 90% of dwellings in the suburb.

Carine encompasses about 5 square kilometres in which there are 17 parks that cover nearly a quarter (24%) of its area.

Another major drawcard for Carine is its proximity to the beach, which is positioned less than 1 kilometre from its eastern border.

Its boundary runs along major roads, which makes accessibility easy, including Mitchell Freeway to the east, Beach Road to the north, Marmion Avenue to the west and North Beach Road to the south.

This provides good public transport links with buses down the urban corridors and access to Warwick Train Station.

Carine’s main shopping complex is the Carine Glades Shopping Centre and features an IGA, speciality stores, fast food, butchers and tavern.

The suburb is set to benefit from a proposed expansion of the Karrinyup Shopping Centre, though, which is a short 5 minute drive away.

The shopping centre’s owner has lodged plans for a $600 million expansion after more than a year of negotiations with the City of Stirling.

The redevelopment would include 150 apartments and aim to draw Australian and international retailers and restaurants.

If approved, construction is tipped to start in late 2016 and take 3 years to complete.

The centre would be the third largest shopping complex in the state and bigger than the recently opened Lakeside Joondalup Shopping Centre.

Carine identifies as an upper-class area due to its high median household weekly income ($2,135), high level of ownership (88%) and large number of professional workers in the area (32%).

School facilities include Carine Senior High School, which is highly rated in the state at 90/100 in the 2014 Better Education Guide, and Carine Primary School.

Are furnished properties a good option for landlords?

Offering a furnished property to tenants can demand higher rental yields, but is it worth the extra effort?

In Australia, there are generally five ways a landlord can make their property available for lease.

1. Unfurnished – the landlord doesn’t provide any furniture
2. White goods – some or all white goods are supplied
3. Partly furnished – some lounges or tables and chairs are provided
4. Fully furnished – the landlord provides all furniture
5. Fully furnished and equipped – all household items are included, from cutlery and kitchen utensils to beds and desks.

The majority of landlords lease properties as unfurnished, or with some white goods included.

This is because if any white goods, furnishings or other included equipment break during the tenancy it is the responsibility of the landlord to replace the item, in most cases.

This can prove to be highly costly, particularly when larger pieces of furniture break, such as washing machines or lounges.

Additionally, landlords are generally required to replace smaller items, such as cutlery and kitchen utensils, in the event that they are broken. For landlords, this can become an ongoing hassle that they have to deal with.

The upside to providing furnishings is that, in most cases, landlords can claim depreciation on the items they have supplied.

Although landlords can demand higher rent with furnished options, this can be offset by tenant turnover, which may lead to longer vacancy periods.

Furnished houses usually attract more transient tenants who need accommodation for short periods (6-12 months), such as students or business people.

Given this, if you are fully furnishing, it’s best that the properties are located close to employment hubs, such as city CBDs or universities.

Equally, the quality of the furniture a landlord provides will also determine the quality of the tenant.

Students might be content with worn couches or furniture from IKEA, but it’s less likely to suit a corporate businessperson.

While providing a furnished option might sound like too much effort, there are instances when it can be beneficial.

For example, take an international business person that needs a fully furnished apartment in the city. Wear and tear on the furnishings is likely to be minimal if the tenant only stays at the apartment every other week when they are in town for business. Furthermore, a tenant such as this is likely to spend more of their time in their office rather than the apartment.

In any event, it’s always best to consult with your property manager when considering a furnished option for your investment property.

Is a development the best option during a building boom?

Residential building approvals in Western Australia hit record highs over the past year, but is it a good time to start your own development?

The number of residential buildings approved for construction in WA reached an average of 2,680 dwellings per month in 2014, according to the Australian Bureau of Statistics.

That is more than 30% higher than the state’s decade average, which stands at 2,043 per month.

There are a numerous factors that have driven the high number of building approvals in WA including record-low interest rates and high population growth.

Another major factor has been the increase in the number of large apartment projects being approved for construction in the Perth central business district (CBD).

However, with such a high amount of activity in the residential construction sector, is it a good time to undertake your own development?

The short answer is yes it is – in the right locations.

There remains opportunities in the Perth market to make a large profit from property development.

However, as is the case in any other economic environment, research is the key to help ensure you mitigate the risks and maximise the profits.

Before you start a development you need to gain a firm understanding of the industry and its intricacies, including how it works and who specialises in what services.

You also need to understand the state of the market – what stage of the growth cycle is the city and selected suburb in? Will the type of development be in demand in that suburb and what price can you receive?

It’s important to spend time researching sites until you have found a project that fits your specifications. Following this, it’s essential to complete a feasibility study to make sure it meets all your requirements and whether you can make an adequate profit.

Once you’ve chosen your site, you’ll have to tactfully acquire it, properly structure your finances and deal with designers and builders.

However, success in property development all starts with comprehensive research and securing the right location.

For example, choosing a development site in Perth’s CBD for a small apartment complex is unlikely to be profitable given the high number of large apartment towers currently planned or under construction.

However, a small, multi-residential development several kilometres from the CBD, but close to a train line, parks and a vibrant activity centre, would typically pose a better investment.

Therefore, undertaking adequate research, completing due diligence and utilising professional services firms where necessary will help to reduce risks and maximise profits for any development project.