3 financial structures that can limit your borrowing capacity

Don’t let your financial structure hold you back from achieving your property goals in 2016 – here are 3 common finance mistakes that can limit an investor’s borrowing capacity.

When seeking to build a sizeable portfolio, many investors focus on the need to find properties that will grow in significant value.

However, investors also need to be aware of their financial structures because the wrong arrangements can severely constrain one’s borrowing capacity, and subsequently their ability to build a large property portfolio.

Here are 3 finance structures that investors should typically avoid.

Cross Collateralisation
Cross collateralisation is when a lender uses two or more of your properties as security to issue you a loan. This effectively keeps you tied to the one lender and can reduce your ability to borrow – in some instances, your lender may stop lending to you altogether. It’s best to secure each loan with one property only to maximise your lending capacity.

Ownership structures
Some accountants or financial planners may suggest you buy property via a trust. While a trust ownership may help with asset protection, this type of ownership structure can also limit an investor’s borrowing capacity. Some lenders will not allow the negative gearing claims for loan serviceability where the property is owned in a trust. Before establishing a trust to buy an investment property, it’s best to engage the advice of a mortgage broker who specialises in investor loans to assess your borrowing capacity.

Joint and several liability loans
When borrowing jointly with another person, you are each individually responsible for the entire debt but only entitled to half the rental income. This can adversely affect your borrowing capacity outside of the joint purchase, particularly if you’re buying with someone other than your partner.

Easing affordability provides bargain buys for investors

Housing affordability in two capital cities across Australia has improved making it a great time for investors to find some bargain buys and build their portfolios.

Both Perth and Brisbane currently represent great value for money for property investors.

Housing affordability has improved in both cities over the past year, according to credit rating agency Moodys.

In Perth, the average household spends about 21% of their income on mortgage repayments, down from 23.9% a year earlier.

This is the lowest level since 2004, and is a result of the low interest rate environment, migration easing from its recent peak and moderating prices over the past year.

Similarly, conditions have also eased in Brisbane where households spend about 23% of their income on mortgage repayments.

The improvement in the housing market in the Queensland capital can be attributed to many of the same reasons seen in Perth.

As both of these cities continue to transition from the resources boom to develop strong and diversified economies, investors are presented with a window of opportunity to acquire high-performing properties at reasonable prices.

Both cities represent great value for money, particularly when compared to Sydney and Melbourne, where households spend 39% and 32%, respectively, of their income on mortgage repayments.

Given the strong, long-term fundamentals of both Perth and Brisbane, it’s a great time for savvy investors to take advantage of the improved buying conditions.

Take action to achieve your development goals

If you’ve always wanted to become a property developer, make 2016 the year that you realise your dreams.

For those who have never done it before, the thought of developing your own property can be a daunting, yet highly exciting prospect.

However, property development doesn’t have to be scary or a highly onerous process. You just have to align yourself with the right people who hold the right skills to get the job done.

Engaging a company to manage the development of your property can be one of the easiest and most financially rewarding ways of developing a property.

Essentially, a lot of the leg work, that is researching and finding the best designers, builders and trades people has already been completed for you.

Furthermore, a development manager will also have a comprehensive understanding of the required processes and procedures, including when to gain council approvals, liaising with utilities providers and suppliers, insurance coverage and contract negotiations and terms, among other issues.

Whether it’s completing a retain and build or the construction of a boutique apartment complex, a development manager will work with you to obtain the most cost effective outcomes, by minimising delays and costs and maximising profits.

A good development manager will have a good track record of delivering a variety of projects. Ask to see or inspect some of their existing projects under construction and even speak with previous clients.

Property development doesn’t necessarily mean having to get your hands dirty or completing physical labour on the weekends.

Additionally, given the efficiencies that a good development manager can deliver, it’s easy to see the value in paying a professional to oversee a development for you.

So if you’ve always aspired to complete a property development, make 2016 the year to fulfil your goals.

Mark the start of 2016 with a cosmetic facelift

With the advent of a new year it can be a great opportunity for investors to complete some minor cosmetic upgrades to keep your properties looking modern and tenants happy.

Part and parcel of owning a property portfolio is the need to complete maintenance and upgrades to prevent properties from becoming run down and looking tired.

While it’s easy to see this as a cost, a better way of looking at this is the upgrades will help to maximise rents – some of these costs can also be claimed as a tax deduction. Furthermore, all savvy property investors should have a specific budget set a side each year for completing such cosmetic works.

In the spirit of a fresh year, New Year’s resolutions and so forth, it can be a great time to complete any necessary cosmetic upgrades your properties might need.

This could include laying new carpet, applying a fresh coat of paint and changing fixtures and fittings, such as taps, door handles and light switches.

Property investors should also consider completing cosmetic upgrades to the exterior as well.

Cleaning outside walls, painting or replacing rusting gutters and completing landscaping can significantly lift the appearance of a property.

Sometimes just focusing on 1 or 2 bigger tasks, such a landscaping or painting internal walls, can make a big difference for the tenant, particularly if the garden is overgrown or paint job is over a decade old.

If you’re using a good property manager, they’ll be able to provide you with a list of recommendations as to the best and most cost effective upgrades to complete.

Syndicates prove popular with investors

Momentum Wealth’s most recent residential development syndicate proved highly popular with investors after closing fully subscribed last month.

The Momentum Wealth Prime Property Development Fund (PPDF), which was launched in November last year, received commitments totalling $4 million and was closed in early December.

The PPDF comes on the back of our highly successful Carine Rise development syndicate, and will target the acquisition of a development site and subsequent construction of a boutique apartment complex.

The PPDF also follows the successful launch of the MPS Diversified Property Trust in July 2015 by our affiliated company, Mair Property Funds.

Following its launch, the MPS Diversified Trusts completed two successful raisings totalling over $6 million.

The funds were used to acquire high-quality commercial properties in Victoria and Western Australia, which will provide robust returns to investors.

Keep an eye out for further syndicates and trusts from Momentum Wealth and Mair Property Funds in the forthcoming year.