Tim McIntyre is the senior real estate reporter for the Daily Telegraph and News.com.au.
Over the past decade, he has attained widespread knowledge of Australia’s many unique property markets and is an authority on all things buying, selling and investing.
His commentary appears every Saturday in the Daily Telegraph Real Estate lift out, as well as online at news.com.au.
If you want to build a serious investment property portfolio, you probably know it’s important to spread your risk around.
Most punters will opt for a range of properties, some that will provide capital growth potential; others with high rental yields; some that seek to plan for their retirement by investing through a self-managed super fund; and also short term investments, whether it’s buying a rundown property, fixing it up and flipping for a profit, or speculating on short term growth and return in a mining town.
But good investment is not just about diversifying your portfolio. Similarly, it can pay to spread the risk around with the bank loans you use.
A lot of people are surprised to hear that big time property investors use plenty of different lenders to finance their purchases, but it makes sense.
It may seem easier to have all your loans with your one trusted bank, but using at least two different lenders will mitigate risk.
First of all, should the value of one or more of your properties go down or stall, it will only affect your relationship with one lender at a time. As long as you don’t default on the loan, the damage is contained.
Secondly, using multiple lenders can come in handy when the time comes to borrow finance for a new property. It will stop the bank from considering the value of your entire portfolio, every time you want to make a new purchase. Lenders are very black and white these days.
They don’t want to risk their money any more than you do. So, even though you think you have a relationship with a certain bank, they will pass any new loan applications to a credit team that you will never meet for assessment. That team might think it perfectly fine to lend you the money, except that one of your existing investments has briefly gone down in value. In that case, they will take the cautious approach pretty much 100 per cent of the time and this will negatively affect your borrowing power.
Finally, the more products you have with a single lender, the more fees you might find yourself attracting. On the other hand, choosing a new lender might enable you to take advantage of special discounts and offers to new customers.
Overall, your best bet is probably to use a line of credit loan on any investments. Choose one that allows for the release of equity in your properties. That way, when a property grows in value, you can take that equity to a new lender to borrow for your next property, rather than having that equity make up for a loss of equity in one of your other properties with the same lender.