Shop around for the right loan
The first thing investors need to look at is the big cost items, such as the interest on their loan and the extra fees and charges associated with that as well. Simple things, such as making sure when you set up a direct debit that there is enough money in the account where the direct debit is drawn from, otherwise you’re going to be hit with both an overdraw fee from the property account and also a late fee from the mortgage side of things. Usually, also, depending on the type of lender, there is a recalculation fee as well.
With the actual loan itself, it’s important to understand that while interest rates shouldn’t be the only focus, they should be a fairly strong focus. If you’re comparing apples with apples, and the amounts of money being offered and the conditions are pretty much the same, then you should really be going with the lower interest rate lender. Even if they are asking for more paperwork.
I would strongly recommend using an investment savvy mortgage broker to do the legwork for you when shopping for your loan, rather than trying to go direct to the lenders. This is because there’s only so many lenders you can approach and you need to know the ins and out of their policies to know what’s best for your portfolio.
When people are shopping around for loans, most seem to go with the lender that they feel they have an allegiance with. Understand that the lender is there for a business transaction and, at the end of the day, there’s no such allegiance when it comes to cash flow.
Once you’ve got the loan, make sure you regularly review the loan itself. For example, I was sitting down with a client yesterday and, when I reviewed her portfolio, what stood out was that most of her loans were on a variable rate and were sitting in the high fours when, actually, with the same lender, there were cheaper rates available on a fixed rate basis. We were not going to do anything on two of her properties in the near future and by simply fixing the rates, we could save 0.5 per cent on each loan. That’s fairly significant in itself.
Know your lender
If you have specific plans for the property you’re buying right now, for example you’ve got a plan to construct a second dwelling on it in, say, a year or two years’ time, you need to research the lender to make sure they will support the construction when the time comes. Otherwise, you could be faced with unnecessary fees and charges when you have to exit this lender and go with a lender that will support the construction.
Some lenders will give you a professional package, but most professional packages don’t have a major financial benefit for you if your loan amount is fairly low. Because when you look at it, most professional packages are packaged with a credit card, which has got a fee on it and its annual fee, and you’ve also got an annual package fee on top of it. You need to take that into account and look closely at all the little bits of fees and charges that you have to pay with the one lender. Check it against the interest rate that you’re being offered as opposed to another lender that’s not offering you the package, but has comparable interest rates. You need to do the real sums rather than focusing on packages and the header interest rate.
Look for hidden insurance fees
Now, from there, you obviously need to look at your normal running costs of your portfolio. A good example would be insurance premiums. Make sure that you research the insurances, the building insurance and the landlord insurance, and look for the ones that are most suitable for the type of property you’ve bought. In other words, look at the fine print. Get a few quotes of comparable policies and make sure that you are looking at it from the view point of, ‘if you were to claim on that insurance, how good is their claims settlements record?’ Is it a hard process? An easy process? The easiest way to work that out is to talk to fellow investors, as they would have all gone through that.
Then, of course, compare the premiums, but also compare the excess charges and fees. When you do make a claim, how many levels of excess will they charge? Is it for each item? Or are they charging just one excess fee? Also, take note of what is the maximum amount they will pay out and what is the minimum amount that they will pay out.
Communication from managers is key
Moving on to the property manager. This is where I would not focus on the management fee. Management fees vary depending on which state you’re in as well as the type of property you have, and they can be anywhere from 4 per cent to 9 per cent. If you are focusing on just the management fee alone, the property manager is likely to cut costs and cut corners, because everyone’s running costs and employment costs is relatively the same. To offer you a cheaper management fee, property managers will have to cut some corners.
I recommend looking at their track history, in terms of how many properties they’ve got to manage, what is their vacancy rate, and how reactive are they to inquiries. Often when I am looking at renting out a property with a credible agent, I pretend I’m shopping with them on two sides. First off, I pretend to be a tenant and call them about a listing or make an online inquiry to see how quickly they come back to me. Secondly, I call as a prospective landlord to see how reactive they are to new business as well. Their level of communication will determine how quickly your property is rented out and, also, allows you to choose them based on these skills. Also, look at what their policies are in regard to maintenance, arrears and all that, because it will have a direct impact on your cash flow.
Regularly review your portfolio
And then, of course, review your property portfolio regularly to see whether there is something you need to adjust or whether you need to, perhaps, look at relisting a property. In other words, selling down a portion of the portfolio to free up equity and cash flow, especially when you’re looking at your loans and they’re moving into principal and interest from the interest-only period.
However, it’s important to keep it real and not panic or start selling down just because of the negative views in the media. As long as you’ve got the cash flow to hold on to your portfolio, this is just a part of a normal cycle and the so called ‘good times’ will come back in again.