Step 2 - Building Your Team
Whilst you will be the one paying for your property portfolio, you won't be (and shouldn't be) building it on your own - you need to have a team of advisors around you to help you on the journey.
I really wanted to use a soccer football team analogy here but have been advised against it, so instead let's think about your property portfolio as a business and you are the CEO - you are the one calling the shots and you are ultimately responsible for the decisions the business makes; however, no CEO does it on their own as they all have a team of people advising them along the way.
Now you don't need to engage all these team members at the same time, they will all be needed at different stages of the purchase process:
(1) before you start looking for suburbs to invest in - these are your core team members who will ideally be with you the entire journey, irrespective of where you are investing.
(2) after you have identified where you want to invest - these are your flexible team members who will likely change dependent on where you have decided to invest on this occasion.
Core team - mortgage broker
Your mortgage broker is your CFO, a good mortgage broker is the difference between you getting 5+ properties or getting stuck after 1 or 2 like over 90% of investors in Australia.
Property investing is ultimately a game of finance - if you can't get a loan you can't buy a property, and that is why a mortgage broker is the most important member of your team in my opinion (they would be Cristiano Ronaldo if I was allowed to do my football team analogy - my G.O.A.T).
A mortgage broker is a licensed professional who acts as a middleman between you (the borrower) and the banks (the lenders) to help you arrange a home loan. Instead of going directly to one bank, a broker has access to a panel of lenders and compares them all on your behalf. Or in other words, they are able to ensure you are getting the best deal for your specific situation as they can compare the offers of various banks instead of just one.
I don't care if your parents know someone at [insert bank] - never go directly to the bank when getting a home loan.
A mortgage broker will be able to assess how much you can borrow from certain banks (i.e. your borrowing capacity) and therefore dictate your budget for your investment property. However, a good investment-savvy mortgage broker won't just tell you what your maximum borrowing capacity is and tell you to go buy a property for that amount of money - as that will likely mean you won't be able to buy another property for many more years as you will need to wait for your income to increase enough so that you have borrowing capacity to purchase again. Instead they will be able to tell you the optimal budget (i.e. purchase price) and yield you should be aiming for so that you don't get maxed out after one purchase but can also purchase properties in the near future.
Mortgage brokers will also be able to assist you with applying for a pre-approval from a bank. For those who don’t know, a pre-approval is when the bank gives you an approval in principle to lend you money within your specified budget. It is not a guarantee of final approval, but it is as close as you will get before submitting a formal loan application and it will help you be more competitive when purchasing a property as you may be able to offer a shorter finance condition or waive it entirely (ask your broker…).
The best thing is, you don't even have to pay a mortgage broker - they get paid by the bank once the loan settles, so they are effectively free to you.
How to find a good mortgage broker
However, not all mortgage brokers were created equal - you shouldn't just use any broker you get recommended by a friend or family member, you need a mortgage broker who specialises in investment loans and building property portfolios. Almost all brokers can do investment loans, but that is not enough, you need someone who knows how to stretch your income as far as it can go with various different banks in order to let you build a sizeable property portfolio.
So how do you find identify these investment specialist mortgage brokers? Well here is a few boxes you will need them tick in my opinion:
They need to be a property investor and have a sizeable portfolio themselves;
They are able to give you a 'game plan' on how to purchase multiple properties - or in other words, they look beyond just the first purchase and give you an idea on how you can get the next property also;
They need to work with a wide range of lenders, typically 20+; and
They are aware of the current market and lending conditions - they know what some lenders are lenient about and what others are not (knowing who offers the lowest and highest interest rates is not enough).
In terms of where to find them, don't go down to a mortgage broker in your area - you don't need to see them in person. I have never met my broker and not sure I ever will because it's just not necessary - calls and emails is enough. You can try give them a Google, but I would recommend joining some popular property forums / Facebook groups (PropertyChat.com.au is pretty good) and look for recommendations there or YouTube is also a pretty good source.
If you go down the buyers' agent route (we will chat about that shortly) they may recommend you a mortgage broker which is perfectly fine, but just make sure they aren't: (1) getting a referral fee; and (2) the broker still meets the criteria above. Alternatively, the buyers' agent may have an in-house broker which again is fine provided that the specific broker you are talking to clearly meets the above criteria and that you have the option to use an external broker still, some buyer’s agents only work with you if you use their broker of choice - this is a red flag.
An investment savvy mortgage broker won't just tell you what to do, they will be able to explain to you why you are electing to do certain things - such as why you should consider interest only vs principal plus interest and whether you need to consider purchasing in a trust instead of your personal name; however, as I have said many times on this website, you shouldn't be blindly trusting anyone with your financial journey so you need to have a basic understanding of some key concepts / questions involved in the property financing world. I have outlined some of these below.
Common questions and concepts
Question
Should I be getting an offset or re-draw account?
Answer
Should I get an interest-only or principal and interest loan?
As investors, we generally want to be electing interest only as opposed to principal plus interest.
Why? Because this ensures that whilst the balance on our loan remains the same it continues to be eroded by inflation over time, meaning that technically the amount of debt we owe is gradually reducing in value because $1 today is worth less than $1 in 5 years' time (we have discussed this in more detail in "Step 1 - Why Property Investing" so revisit this for more context). In the meantime, the value of the property we purchased continues to grow in value over time.
Additionally, whilst electing interest only might slightly reduce our borrowing capacity it does noticeably help with cash-flow as the repayments will be much less than principal plus interest which makes our property easier to hold whilst giving us more cash to save up for our next deposit.
This interest only period generally lasts 5 years but isn't available at all banks. Provided your financial position allows for it, you can also continue to refinance with the same / different banks to ensure you remain on interest only for the entire period that you hold the property.
But what do you do with the debt if you never start repaying the principal? Well you can switch to principal plus interest once the rental income of your property is sufficient enough to cover the increased repayments, or you can sell the property (or a different property) one day and repay the debt using the profit you made on the investment - which is what smart investors do. But don't get too caught up in this now, we will talk more about this in Step 3 regarding property exit strategies.
Please watch the below videos for more detail - it will help.
Don’t view LMI as some scary cost you need to avoid at all costs. You need to view it as the cost of doing business sometimes. In case you are not aware, as it is a common misconception, LMI is not an upfront cost you need to pay in cash when you buy a property, it just gets added on to your loan balance.
If you are employed in one those professions which means you can avoid LMI then that’s great (i.e. lawyers, doctors, nurses, teachers etc.) - do that; however, if not, don't delay purchasing a property just so you can avoid paying LMI.
The reality is that if you purchase the right investment property, in the time it would have taken you to save up enough money to avoid paying LMI the value of your property would have already increased by a greater / equivalent amount.
Generally speaking, if you cannot avoid LMI through an exemption / waiver you should aim for a 12% deposit as this is considered the sweet spot between minimizing your LMI and the amount of upfront cash you need to contribute as part of the deposit. Chat about this with your broker as it may not best for you.
Check out the below videos which explain the return on investment with LMI quite well.
Trusts are all everyone is talking about in the property investing world today, but the truth is that buying properties in a trust is a bit of an advanced property investing strategy so I am going to tell you what someone told me (it was Jeremy Iannuzzelli from the below video actually) - if you are just starting your investment journey, just keep it simple and buy a property in your personal name, especially if you have a decent income and have mapped out your next purchase already with your broker.
However, do talk about it with your broker and accountant because depending on your income it may be worth it to start buying in a trust straight away.
I am not going to try explain the concept of buying in a trust versus your personal name here as I think the below videos explain it very well - so if you are a bit more of an experienced investor or are just generally curious check them out.
Disclaimer: always talk to an accountant and a lawyer before establishing a trust, some brokers may use a standard off-the-shelf trust incorporation method online using stock standard documents which may not be sufficient for your personal circumstances. I can't stress this enough, please don't rush and skip this step…
Should I pay LMI if I can't afford a 20% deposit?
Should I purchase a property in my own-name, jointly with my partner or in a trust / company structure?
Some banks are also cracking down quite hard on the trust borrowing strategies mentioned above (Redom Syed has made some good videos explaining this, I have linked one of them above) - so make sure you strategise with your broker and accountant.
Generally speaking, you should get an offset account if you can. If you don’t know how an offset account works I'll give you a quick example / explanation.
You have a $500,000 loan which you are paying interest on. If you have an offset account with $50,000 in it, instead of paying interest on $500,000 you are actually only paying interest on $450,000 - i.e. you are paying less interest on your loan just because you have some cash sitting in an offset account, so yes get one if you can and depending of what your savings account interest rate is (i.e. is it lower or higher than the interest rate on your loan) it may be worth parking all your savings in an offset account - not financial advice but think about it.
I am not going to go into this one in too much detail as I think this video explains everything else you need to know.
Questions to ask your mortgage broker
Now you have some knowledge of the key financing related concepts, you need to have a think about what questions you may want to ask your mortgage broker to help you narrow down the type of the property you should be buying, what structure you should be using, what your lender options are and, if applicable, how you can refinance / optimise and existing properties you own. I have included some example questions below in case it is useful.
Strategy Related Questions
Should I be going interest-only vs principal & interest in my situation if I am trying to build out a property portfolio?
How much of a deposit should I be looking to put down for this purchase based on my situation? Am I eligible for an LMI exemption, if not, how much LMI will I incur?
Taking into consideration my borrowing capacity as of today, how many properties could I realistically purchase, and what would be the approximate purchase price of each property? Is there anything I can do to improve my borrowing capacity?
What level of rental yield would I need to achieve to keep borrowing money from the banks and expanding my portfolio?
Lender Selection Questions
Which lenders are available to me, and how would my borrowing capacity differ if I went with a first, second, or third-tier lender?
If I use a second or third-tier lender, when could I look at refinancing to a better lender and what are the benefits of doing this?
Should I be opening an offset account and what lenders will let me do this?
Structuring and Trust Related Questions
What strategies / structures can I use to improve my borrowing capacity going forward so I can continue expanding my portfolio?
Should I be purchasing this in my own name, jointly with my partner or under a trust / company structure?
How does purchasing under a trust structure affect my initial borrowing capacity and my borrowing capacity going forward?
Based on my situation, at what stage should I consider buying property under a trust structure?
Refinancing and Equity Extraction Questions
Should I be using multiple lenders and if so, why?
When should I consider refinancing, and how does that effect my ability to borrow more money?
How often can I tap into equity, and what factors affect when and how much equity I can extract?