Last week I shared with you the truth about what really moves property prices – and that’s money. If you have it, that’s great, you are in the game. If you don’t – then you need to get some.
It’s a good thing there are very profitable businesses out there that cater for that exact need – they are called banks. To accelerate your chance to gain wealth through real estate you simply must be able to borrow money, at least until the point you can sell down what property you have to pay off the debt and still have plenty of income for your lifestyle from the property you still own.
To give yourself the best chance of getting some of that cash, there are six important steps you need to take before applying for a loan – and all of these need to be done well before you get out in to the market place looking for property. Some of these are self-evident, but nevertheless important.
1. Have a steady job – the banks like it better the longer you are in your job. If they see job-hopping on your application, they assume you are not stable in your work and therefore your income is at risk, therefore you are not a good person to lend to. If you are running your own business, you need a minimum of two solid years of profitable, up to date tax returns to submit as evidence of your income. Minimising your profit (legally) through a business might save you some tax, but it won’t help your borrowing capacity.
2. Savings – Your friendly lender will want at least 5% of your purchase price in savings over a 6 month period. They prefer 10%, but really start to warm up to you if you can put down 20% as a deposit – if you can do that, you can avoid the real gods of money – the mortgage insurers. Every loan that has less than 20% deposit must have insurance to cover the bank if there is a loss, and of course you have the pleasure of paying for that insurance. If you aren’t saving yet, start now. I’ll talk a bit more about how to take charge of your finances next week.
3. Get your debts under control – the first step to dealing with those evil pieces of plastic in your wallet is to cut all but two of them up and limit your use of the remaining two. Do what you can to pay them off each month. Start a debt reduction plan, focusing on one card at a time. If you have many credit cards, the bank will assume that you could go out and do cash advances on all of them at once. They will reduce the amount you can borrow for your investment property because of that.
4. Check your credit report – your credit report will contain any loans you have applied for or been approved for and any outstanding debts, even over a number of years. This is more important than ever as recent law changes mean that even for the most trivial of debts or late bill payments, creditors like electric companies for example, can report your debts after just 30 days late – so make sure you pay your bills on time. There are a number of agencies that offer a free initial credit report, which takes ten days or so, or you can pay for an instant report. Some will charge you for ongoing services or to help you clear your report if there is a problem or if you need other financial advice. Without making a recommendation, some of these are – www.creditrepairaustralia.com; www.checkmyfile.com.au; www.fixbaddebt.com.au. Getting a copy of your report can alert you to any issues you may not be aware of.
5. Determine Your Credit Score – the friendly banks also have a way of rating you to determine how credit worthy you are – they look at your age, postcode, length of job, banking type, how long at your address, whether or not you own or rent and so on. The average score out of a scale of 1000 is 750. Find out what yours is and do what you can to increase it. Don’t do anything to decrease it – for example, moving house can drop your score by 80 points, changing banks by 30, and getting divorced drops your score by 100! Some of the websites above can help you determine your score for free – though www.checkmyfile.com.au works well.
6. Set up a meeting with a competent finance broker – a finance broker has access to many different lenders and they can assess your situation and guide you towards the best solutions for the kind of loan/s that you need. A really good finance broker will do the best he/she can to ensure that the loan you get will be a springboard for your next property. A fantastic broker will sit with you and help you work out your long term plan for the number of properties that you want. If you don’t have one of these people on your investment team, I can proudly recommend my friend Margot Whittington, who has a strong financial counselling background and is a gun finance broker – you can reach her at Margot@wamoney.com.au.
And a last thought from Earl Wilson – Today, there are three kinds of people: the have’s, the have-not’s, and the have-not-paid-for-what-they-have’s.