Build your deposits to grow a large investment portfolio

Build your deposits to grow a large investment portfolio
Urban EditorialMay 28, 2020

One of the most important factors in building a large investment portfolio is generating deposits that allow you to continue purchasing. This aspect of property financing is often overlooked as many people spend their time focusing on how to maximise their servicing. However, having servicing capacity is only useful if you can also produce the deposit needed to purchase! Investors will often look to the equity in their existing portfolio to use as the deposits for new purchases. A good finance structure will play a large role in maximising the amount of equity you have access to. This in turn gives you the firepower to continue to grow your portfolio. 

Here are 2 financing tips for those thinking about using equity to grow a portfolio.

Flexibility from the bank will help you release equity
Some banks are much easier to deal with when it comes to releasing equity, while others can be a massive roadblock (particularly at higher LVRs). Banks will ask what you plan on doing with the equity release and how detailed an answer they require is key to getting your equity out.

If the lender determines that the equity is being released in order to take on more debt (say another loan with a different lender who has a more favourable servicing calculator), then they will have to add an estimate of this additional debt to your servicing. This often results in a servicing fail and it means that the lender won’t approve of the equity release.

Therefore, taking into consideration the process each lender uses to approve equity releases and what verification they require is an important consideration as part of lender selection. Having your loans with lenders who have favourable equity release policies is a great way to position your finances for future growth.

This perhaps is the greatest tool to finding equity that you didn’t think that was there. There are three main types of valuations: a computer estimate, a ‘kerbside’ valuation and a full valuation.

A computer estimate is allowed by some banks at an 80% LVR. Due to their automated nature , these estimates can produce better results than when a conservative valuer walks through the door. It typically helps when you have a property that isn’t as glamorous on the eye but has features that a computer can recognise is valuable. A computer can’t see your renovations, but it does know you’re land size, bedrooms, and comparable sales. 

Being with a lender that allows you to use this valuation tool is a great way to maximise your chances of being able to release equity. This is because you can always upgrade the valuation if you think the computer underestimated the value, but if you think it is favourable you can just accept the computer valuation and access the equity. 

Lenders that don’t allow computerised valuations will make you complete a ‘kerbside’ or full valuation as part of any equity release application. A ‘kerbside’ valuation is when a valuer drives by the property as makes a valuation assessment based on what they can see from the street. A full valuation involves an external and internal inspection by the valuer and a full report is issued outlining the estimated value. 

By choosing your lenders carefully, not only is it ensured that you are best placed to service a large portfolio, but you are also best placed to take advantage of different tools and techniques that savvy investors are using to get that little bit further.

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