It is very important that you understand that the lender wants your business more than you want theirs, so make it easy for them to say yes. This is especially so for mortgage brokers who have a long term vested interest in lending you as much money as they can justify otherwise why would they be so willing to come into your home at night time to sit with you on the kitchen table with the TV blaring and the children playing havoc.
So I have provided a useful guide to help you make a professional submission that will make it easier for the lender to say YES.
1. Act Professionally
You will need to negotiate with the lender as a Professional Property Investor to obtain the finance deal YOU want. Here are some tips:
When talking to a financier, wear professional attire on all occasions and make sure you are well groomed.
Meet the financiers in his offices unless your premises will leave a good impression
Convince the financier that your knowledge and skill has enabled you to find a great property with the potential for huge capital growth. If you bought the property by private treaty, make reference to your great negotiating skills which secured the property at a good price. Ultimately, you are trying to ensure that the financier will come to trust your knowledge and will seek an ongoing business relationship with you, as your success is also their success.
An good way to prove your skill is to obtain a list of comparative sales within the area or development which show higher prices than your purchase price.
2. Prepare a Professional Finance Proposal
Prepare a Professional Finance Proposal which includes:
1. Valuation of the property and its Rental potential
a) Market valuation of the property a recognised valuer acceptable to the bank. Remember that Valuers rarely give a valuation higher than the market price and they use historic values to justify the current property price. It is up to you in the following steps to prove the future growth potential of the property.
b) Rental Valuation report which assess the rental potential of the property. Forget about the 1 page airy-fairy appraisal that real estate agents often provide as they will detract from the quality and substance of your report. Click here to access the Free reports & tools that are ideal for adding credibility and substance to your report.
3. Positive market research
Your proposal should contain positive media articles. Additionally, provide as much market research as you can find that supports your price or higher. The more comprehensive your proposal, the better.
4. Pictures of the property and its finishes, floor plans and other relevant information relating to the property
a) Include pictures of the property and surrounding area plus any plans and drawings you may have. In the case of a property being renovated or developed, the idea is to create picture of what the property will look like when it is completed.
b) Highlight the proximity to desirable amenities such as nearby water, golf courses, parks, shopping centres, schools etc. which add value to the property and it’s potential for capital growth.
5. Ensure that all this material is properly bound in a professional looking presentation folder
3. Obtain a Professional Financial Analysis
Obtain a professional financial analysis (prepared by an accountant or an accredited consultant) in regards to the property and your particular financial situation.
The analysis should include the following information:
1. The structure you will use to purchase the property (personal name, trust, company, etc.)
Ensure the structure you wish to use to acquire the property (following advice form your accountant) is properly set-up prior to going to the financiers. You do not want to make it seem complicated as it may put doubt into their mind.
2. The property’s depreciation schedule.
Have a quantity surveyor prepare a depreciation schedule for the property, not an accountant. This way you are able to more accurately determine the after tax benefits as well as show that you know what you are doing. If you need help with this then click here.
3. All the taxation benefits associated with the property and their effect on your overall holding costs.
In many cases, even though the rent may not cover all outgoings, the after taxation benefits may be sufficient to make the proposal positively geared or at least go a long way to showing that you can service the loan. If you pay PAYG tax then show how you can claim the benefits from the deductions when you get paid rather then at the end of the year when you submit your tax. This will not only show an improved cash flow but will also show your expertise.
4. A long-term (minimum of 20 years), financial projection of the property which includes the expected and estimated cash flow and capital gain projections.
Estimate the long-term capital growth of the property; the long-term rental income potential, long-term costs and estimated personal income over the long-term. If you don’t provide your estimation then the financier will make their own estimates and they may be a lot lower than yours. So make sure that you can support your claims using past trends, and/or future prediction reports from companies like Residex.
4. Obtain Quote on Property Rental Income
Now that you have convinced the financier of the low risk and high success of your proposal you now need to under write the potential cash flow from the property which is essential to help fund the finance.
It is vital that you can verify the rental estimate of the property’s rental potential. Even though it may be currently rented, it may be under market value or you may be making additions or renting individual rooms to university students which will improve the rent return. To achieve this you need the following:
1. Rental Valuation report which assess the rental potential of the property. Forget about the 1 page airy-fairy appraisal that most local real estate agents often provide as they will detract from the quality and substance of your report. Click here to access the Free reports & tools that are ideal for adding credibility and substance to your report.
2. The financier will sum your personal income and the rental income potential of the property to determine your ability to service the debt for the property. If you don’t provide this estimate, the financier may assume the annual rent to be between 4% and 5% of the capital value of the property and adopt 80% of this figure.
3. The rental estimate is equally as important as the market valuation particularly with respect to your ability to obtain maximum finance. The lender normally accepts written rental estimates from reputable real estate agents. So include a corporate profile of the agent providing the appraisal. This will add credence to your report.
5. Demonstrate you are a risk averse professional investor
Financiers are mostly risk averse and will want you to demonstrate a risk averse attitude also. Pre-empt their requirements and indicate you are prepared to obtain all necessary insurance cover.
Obtain appropriate and adequate insurance
· Income Protection insurance
· Trauma and disability insurance
· Term life insurance
· General property insurance
· Landlords’ insurance
Make sure you seek advice from a qualified and experienced advisor. Have the advisor prepare a risk assessment report and how these risks have been covered and include this and the policy statements in your report as evidence for the lender.
All insurance policies relating to property investment are tax deductible. They should not be treated as an option but rather a necessary cost of doing business. Think about what would happen to your loved ones if you left them behind with no succession plan or income stream but massive debt. This could easily be avoided by having the correct insurance policies.
If you aren’t prepared to obtain insurance cover, then you shouldn’t be buying property.
If a large portion of the income to service the loans comes from rent then this can make the Lender nervous. To combat this concern you need to:
· Ensure your properties are under long term leases
· Build up history so that you can show the Lender that your properties are normally fully tenanted. Supplying your annual rental statement is a good way to do this
· Show a history of rental growth
· Provide the Lender with a due diligence on the rent potential of the property if it isn’t already tenanted. Click here to go to the Rentability Analysis tool.
6. Establish rapport with your lending manager
Tell the lender of your intention to maintain a profitable, long term relationship.
· A good relationship with your lender is important to a professional property investor.
· It can help minimise problems
· It can be helpful when applying for finance in the future.
You want to convince the financier that you are establishing a business partnership with a view to undertaking multiple deals.