What to do if you can't get finance: Craig Turnbull

GUEST OBSERVER

It is often said that the most important factor in successful real estate investing is – location, location, location. And in some respects that is correct. 

Though there are so many other factors that come in to what can affect real estate values – like supply and demand; unemployment; average incomes; proximity to infrastructure like transport, shops, schools, medical facilities; population growth including natural births & immigration. It can be quite a long list of elements to consider.

Most commentators ignore what I now believe to be a critical factor in the pricing and relative value of real estate. The lifeblood of building a property investment portfolio is money. That is – money you borrow to buy houses, apartments, townhouses or other income producing real estate. If there is plenty of money available at cheap prices (low interest rates) people will borrow to buy and drive prices up. If the money supply is tight and fewer people can borrow to buy, the assets prices can no longer be supported.

Recently, the Australian Prudential Regulatory Authority (APRA) at the behest of the Federal Government bought out new guidelines for the big banks in terms of what and how loans can be made to real estate investors.

It was to be a “tap on the brakes” to slow down the property market by reducing the amount of loans to investors – principally aimed at the very hot Sydney market. It has turned out to be interpreted by the banks as a big red stop sign – it seems as if they have effectively “slammed on the anchors” in terms of money being loaned to all property purchasers and particularly to investors. The way the banks are assessing loans to investors in terms of serviceability has also changed, making it much harder for them to qualify for a loan to expand their property portfolios.

A new report by J.P. Morgan Australian Mortgage Industry Report, released last month, revealed that up to 10 per cent of investors are now unable to obtain the finance they need to continue acquiring property.  This has clearly taken heat out of the market – some might say that’s a good thing.

However, most markets, apart from Sydney & Melbourne were already soft or declining – they didn’t need any more hammering. With less investors in the marketplace, less rental homes will be provided, so over time rents are likely to rise.

So the Government & APRA policy has effectively worked to dramatically lower demand (& likely prices) in our property markets – without having to lower interest rates, which they felt might give property prices another push upwards.

All the media chat about the removal of negative gearing tax benefits & capital gains tax changes must also be weighing on the confidence of people who want to invest in real estate for their future.

And not only are investors struggling. Experienced developers with otherwise profitable projects now face much tighter qualifying parameters for construction loans. This will act to restrict the new supply of homes & apartments coming on to the market. And in my opinion, it this continues for too much longer, will set the foundations for the next round of property price increases.

So what can you do if you can’t borrow?

Well let’s first look at some of the things you can do to improve your borrowing ability:-

1. Increase your income – this might seem like a no-brainer, but if you can earn more, you can borrow more. This could be a pay rise or a second job. Maybe it’s time to get some rent increases from the properties you own?
2. Increase deposit size – by savings or perhaps selling other assets – be that shares, a car or even stuff lying around the house you aren’t using anymore, the bigger the deposit you have relative to how much you want to borrow, the better chance you have of being approved.
3. Lower your credit card limits – the banks will assess your credit cards as if fully drawn, even if they are not being used and cut your borrowing ability. You could choose to cancel the cards you don’t need and lower the limits to the minimum possible to allow you to use them effectively. Perhaps you could look at consolidating loans you have to lower your monthly payments?
4. Bank Criteria – banks also look at things like - how long you have been in your job – the longer the better – job-hopping won’t help; how long you have resided at your present address – the longer the better; regular savings – any pattern you can demonstrate will help convince the bank of your worthiness.
5. Examine existing loans – you might be able to make a significant saving in your payments by re-financing to less expensive lenders. 

So, if all of those finance tweaks still mean you can’t borrow to invest in more real estate what can you do?

Well, you could just sit back and wait until you can borrow more – that might be years from now.

Or you could get involved in the next generation of real estate investing, right now. You don’t need to borrow and you can start with amounts as little as $5,000 or more. And you will likely be able to invest in property deals in various locations around Australia which could help you diversify your portfolio.

Craig Turnbull is an author, property developer and real estate investor. He can be contacted here.