Monday, 7 May 2012

Investing in Real Estate - Getting the Finance

This is the eighth post in my Investing in Real Estate series and will answer the question: How do I get finance for my real estate investment.  I should stress beforehand that I will be writing this from the Australian perspective however many of the tips and advice is generic so can be followed anywhere.

Getting finance for a real estate investment in an ordinary market environment (i.e. not one where there is a real estate crash) should not be a difficult ordeal provided that you have done your work in advance.  There are several things you need to do both before and after you put an offer on a property.

Before you make an offer on a property
  • Work out how much the bank is likely to lend to you: The rule of thumb is that if you are relying on your wages to get the loan (i.e. you do not have lots of investments / business income) the bank will not lend you an amount which causes interest payments to be more than 30% of your gross income after taxes.  (e.g. if your income after taxes is $50,000 and the prevailing interest rate on mortgages is ~7% then the maximum the bank will lend you is $50,000 * 30% = $15,000 / 7% = $214,857).  Note that this is only a very rough calculation.  For investment properties they will also count the amount you are likely to receive from your investment as well as any tax benefits and so lend you more
  • Have a decent deposit before you purchase:  I know a lot of real estate 'gurus' suggest using 'no money down' or using super small deposits so that it leverages your return a lot.  I am not going to give that advice.  Doing that naturally adds extra risk because it does not give your property price anywhere to go before the bank is contractually entitled to foreclose.  I suggest having a deposit of 10 - 20%.  In Australia a 20% deposit will normally mean that you do not have to pay Lenders Mortgage Insurance which costs about $10,000 and is a significant upfront saving
  • Have your sums already done and take them to the bank:  In previous posts I have outlined all the work and calculations you need to do while working out how to bid for your property.  Clean these up and put them in a presentable format.  If you look like you know what you're doing banks will always be much more comfortable dealing with you
  • Get pre-approval from your lender:  Subject to finance clauses always spook people selling houses.  If you can avoid putting one in because you know that you are going to get the finance for the deal then it makes the buying process much easier.
Getting the loan from the bank
  • Do a price comparison between banks before you go to one: Doing your research online is easy and make sure you have all the relevant information under your belt when you go to see a bank.  This includes knowing things like their standard rate, any fees for things like re-draw facilities and fees for early exits and paydowns. 
  • Speak to a mortgage broker as part of the process: Mortgage brokers are a great resource.  They specialise in loans and will often know how to get the cheapest one.  Keep in mind that not all are good and some are motivated by the kick backs they get from different banks.  Most will also try and pressure you into using them but only use them if they are giving you the best possible deal
  • Do not be afraid to negotiate: When you have sufficient information you should not be afraid to negotiate.  Banks want your business and will almost always offer you great deals if you ask for it - this includes lowering the standard variable rate (in Australia if you borrow more than $250,000 they will normally give you 0.6% off easily), waiving of fees and other benefits.  You need to know what comes as standard so you don't think you're getting a special deal when in fact your not.
  • Have all your documentation ready and constantly follow up:  This is especially important if you have put a relatively short close period on your purchase contract.  Banks will always take their times and approve at the last possible moment so it is worth following up with them relatively often to ensure that you do not have to pay penalties for late completion of your contract (this is also true of mortgage brokers)
Other advice about financing your investment property
  • Do not be afraid of using multiple banks:  A lot of people want to use the same bank as their own home loan or where their savings account is.  It is not a bad thing to have loans across multiple banks as it avoids the pressure to cross collateralise.  Further what you want is the lowest possible finance cost for your property and your local savings bank may not be the solution
  • Confidence is key:  It is cliche but true that banks want to lend to this people who don't need it.  So when you go to a bank keep in mind that you are not desperate for the loan, they want your business and you are doing them a favour by using them.  It helps settles many of the nerves that come with an interview with the bank manager
  • Work out what type of loan you want before going to the bank:  I use an interest only loan for my investment property as I am happy with my level of leverage and want to leverage my returns at the same rate into the future.  Some people are more comfortable with principal and interest loans which increase the equity share in the property and reduce the interest payable as time goes on.  Whatever you want - work it out before going to the bank as this will reduce the options they give you.  You want to be able to compare the exact products across different banks


  1. Thank you for your post! I have been looking into investing in real estate but was confused about where to begin. I will definitely keep these things in mind. Keep the great info coming.

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  2. Thank you for your post! I have been looking into investing in real estate but was confused about where to begin. I will definitely keep these things in mind. Keep the great info coming.


  3. The first thing about investment is the financing. Getting the right finances can get you good deals in property investment...

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    1. Certainly getting your finances in place before you search for propety can make the process more certain though I'm not really sure how you can get a better deal (i.e. lower price) by having the right finances. I'd be interested to hear more.

  4. Great stuff. Very incisive post, i really appreciate it. Nras Finance