Hello
I am sure someone will be able to help me out.
How can you expand a property portfolio quickly without cross-collateralising?
In Steves latest book (0 to 260 properties in 7 years) it says to Avoid Cross-collateralising page: 167 (the chapter on how to survive and thrive in a property downturn)
I always thought that you would buy one +cashflow property, IO loan, use some savings of your own and some equity and by another house and so on. But Steve says "In a worse-case scenario all you need is one asset to go bad in a cross-collateralised portfolio for a domino effect to occur which puts every asset at risk."
Can someone please educate me…please.. whats the best way to expand quickly and safely?
I may be misunderstanding all this.
Thank you.
Hi swifteagle,
You can avoid cross-collateralising by using the equity in one house as a cash deposit for buying the second house. For example, you have a PPoR valued at $500k with $250 owing. This means you have $250k equity in your PPoR. When you want to buy an IP, you can draw the equity in your PPoR (say $100k) and use that for 10% deposit and closing expenses for your new property. This would increase the owing on your PPoR to $350k but there is no cross-collateralising.Hope this helps.
Yes, you just withdraw equity from the existing properties by setting up lines of credit and use this for deposits on the next ones. This way keeps them all separate and you can easily go to multiple banks. If you have any spare cash, this should be put onto your PPOR loan first to reduce bad debt, and then reborrowed for investment purposes.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Guys thank you very much.
It makes sense what you are saying, but then and other question came up, why would someone cross-collateralise if they could do what you guys just told me and it would be safer for them?
regards.
Swift
Simple answer is a lot of mortgage brokers or bankers now no better.
They are not property investors and are merely looking at the total security cover.
Alternatively some organisations recommend X collateralising your loans with one blanket line of credit because on the surface the interest rates look good. In most cases they will however receive a bonus commission or overide payment for doing so which they may fail to advise you of.
Brokers who use the CBA under their line of credit will receive such a additional payment on volume business.
Richard Taylor | Australia's leading private lender
So it is better to stay away from cross-collaterasating altogether, right?
Absolutely where you can.
Richard Taylor | Australia's leading private lender
Hi Swifteagle,
I always stay away from cross cross-collateralizing, even though banks try to tie you up this way. The way that I would do it as I expand is to setup different company & trust structures to own different properties. I also then use different banks, so that all they need you to do is offer a director's guarantee. Using this method, you are able to expand without reaching the glass ceiling quickly with one banking institution.
Hope this helps Swifteagle.
Hi Swifteagle,
I always stay away from cross cross-collateralizing, even though banks try to tie you up this way. The way that I would do it as I expand is to setup different company & trust structures to own different properties. I also then use different banks, so that all they need you to do is offer a director's guarantee. Using this method, you are able to expand without reaching the glass ceiling quickly with one banking institution.
Hope this helps Swifteagle.
Cheers Gerry
Gerry thanks for your post.
How many properties per structure would you have, so you are not force to cross-collateralise? I hope this makes sense.
creating a structure per property would not be cheap!
Gerry
Rather an expensive way of avoiding Cross collaterilising your loans.
Not only do you have the set up costs for the Trust and Pty Ltd Company but also possible Land Tax issues depending in which State you are in.
Lot easier and cost effective ways of avoiding maxing your serviceability.
Richard Taylor | Australia's leading private lender
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