05 Feb Property gearing tips – Shannon Davis
Shannon Davis answers some of your questions and in doing so, he warns about believing everything you are told. Sharon asked us to help her understand how to gain benefit from the equity she has in her 1 bedroom unit to get another property.
Kevin: My special guest in studio is Shannon Davis from Metropole Property Strategists and Image.
Good day, Shannon.
Shannon: Morning, Kevin.
Kevin: Let’s get to a couple of these questions, Shannon. Interesting one from Sharon.
Sharon writes: “I have a one bedroom unit worth about $450,000 with no mortgage, and I’m thinking of using the equity in this property as a deposit for my next property purchase. What’s the best way to access this equity, and can I still claim the interest as a property expense? Is there anything different with accessing this equity as the unit has already been paid?”
Shannon: Yes. First off, congratulations Sharon for paying off your apartment. Yes, that’s definitely an easy one to do. What you’re looking for there is an equity release. We don’t want to give too much security to the bank, so we use the paid-off property and we take some seed capital out of that property.
Kevin: Normally, how much would you take? Is it a percentage?
Shannon: I think, yes, go for the deposit. With an equity release, you’re essentially borrowing the whole lot, so take as much as you need for a deposit and then see a separate bank for the investment property. It’ll be a full deduction but…
Kevin: Okay, so if Sharon’s going to go out a buy something with $600,000, she’s going to pull the deposit out of what she already has in equity in her current unit, and let’s say she’s purchasing something for, say, $600,000, just to give us a round figure. Would she pull out 10% or 20%?
Shannon: Yes, take $150,000 or so.
Kevin: Yes. Will the bank then want a hold over that entire unit?
Shannon: If you cross-securitize.
Shannon: What we’d suggest you do is get an equity release and see a different bank for that and use your equity release for the seed capital for the secondary purchase. It will be a full tax deduction, and the tenant is essentially going to pay about 75% of your expenses. From there, you have your property A securing that investment property and they’ll both appreciate.
Kevin: So effectively you’re borrowing the full purchase price but you’re doing it by accessing some of the equity you currently hold.
Shannon: Yes, that’s correct.
Kevin: Okay. Have you got any other recommendations for Sharon, by the way, because I cut across you there?
Shannon: No, but it’s a good thing to have done and you’re making your money work for you a little bit more. As long as you don’t give too much security to the bank. What happens then is the bank is going to be lovely and they’re going say, “Yes, we’ll give it to you” and they’re going to cross-securitize, which means if anything went wrong, they have full control of the sales of both properties. You don’t need to give them, say, a million dollars of security for a $600,000 purchase.
Kevin: You’re talking here about the both lenders.
Shannon: Yes, being cross-securitized with one lender I think would be the one thing to watch out for there.
Kevin: Okay. Who should Sharon be talking to about this?
Shannon: A good finance person – a person who’s probably more than just her existing bank manager.
Kevin: You wouldn’t go to the bank manager?
Shannon: Well, they’ll just tell you what’s in their best interest, really.
Kevin: Of course.
Shannon: Get a couple of opinions, and see what is best for you here.
Kevin: Is this where brokers start to come in now?
Shannon: Yes. Brokers have got access to the whole market rather than just what one bank specific offerings are. And it’s more than just interest rates, I would think, too. People get stuck on interest rates, but there are other facilities in a line that makes it more appealing.
Kevin: Like what?
Shannon: The option to have offsets, be able to pay it off sooner, perhaps locking a portion of your loan to fixed interest or letting it float on a variable rate. They are all things to be taken into account and a person needs to sit down with Sharon and see what’s in her needs and what’s the best fit for her.
Kevin: Would a broker be able to advise Sharon in relation to the entire loan now that we’re dealing the two lenders?
Shannon: Yes, definitely. Not just any broker; someone who specializes with investments and can tell you the ins and outs of the finance industry.
Kevin: How do you find one of those?
Shannon: They’re just going to take an interest in your needs as far as your timeline for investing, what you want from your life, and not just trying to transact and get a commission out of you.
Kevin: In other words, we’re not just looking for a solution to this situation; it’s more “Let me ask you some questions about you, what you want to achieve, and we’ll come up with a package for the whole thing.”
Shannon: That’s correct.
Kevin: You look at the whole thing as a picture.
Kevin: That seems to be more than way, too. I know that’s more developing a strategy, and I know that as a property strategist that’s what you guys do at Metropole. So you really have to come up with a strategy, don’t you?
Shannon: Yes, definitely. I think when people ask questions about what they’re trying to achieve? How long have they got to do it? Where are they in their working life? What serviceability do they have? And when you take in all those points of view, then you can have a property strategy at its highest and best use for your particular circumstances.