7 Top Financial Blunders That Cripple Your Property Investing Future
If you expect to achieve financial independence after buying an investment property or two…and you expect to get there without making any mistakes, then I’m afraid I’ll have to burst your bubble right now. You WILL make mistakes, of that I’ve no doubt. We all have.
But what is MORE important than making mistakes is learning from them. When we use the knowledge we’ve gained through both our failures and our successes it can carry us forward as property investors.
And while we can learn from our own mistakes, an even better scenario is to learn from the mistakes of others.
Towards that end I’d like to share with you seven financial blunders that I’ve often seen among property investors, especially when they first start out building their property investing portfolios.
Learn from these examples and avoid making the same costly mistakes.
Mistake #1: Increasing their credit card limit
Credit cards can be a drain on your finances, especially if you have a large credit limit and your card is maxed to the hilt!
It can also impact your next investment property purchase because it reduces your serviceability.
Rather than accept every credit card limit increase that the bank sends your way, keep your credit limit low – $2,000 is a good figure – and use it only for emergencies.
Mistake #2: Using only one lender
A common mistake that I see time and time again is the use of a single lender for every financial need. This strategy works in the bank’s favour, not yours.
If you have your car loan, personal loan, home loan and investment property loan with a single lender you are effectively shutting down your property investing future.
Once you reach a certain financial level, the bank can seize all of your equity, impacting your ability to continue growing your investment portfolio. Unless you love hemorrhaging money, you don’t want to do this!
Assuming you like to keep your cash, simply use multiple lenders for each financial need you might have.
Mistake #3: Cross-Collateralisation
When dealing with lenders remember that they are focused on minimising the risk to themselves, choosing to shift as much risk as possible to you, their customer.
It’s up to you to not let them do it!
For example, if you want to use your equity to purchase another investment property, your lender may suggest you let them connect the properties together so that they have security over both rather than withdraw your equity as cash.
Nearly always a bad idea.
This is a mistake – one that will limit your LVR, keeping you from borrowing more money.
Don’t cross-collateralise your loans if at all possible.
Mistake #4: Allowing an “all monies clause”
One of the best clauses every bank will try to put into a mortgage is the “all monies clause”. Of course, when I say “best” I mean it’s best for the lender, not you. In fact, from the viewpoint of a property investor it’s one of the WORST clauses and you DON’T WANT it.
In essence, this clause allows the bank to take any of your available funds on account with the bank including bank accounts, savings, credit cards and mortgages to be applied to your mortgage balance(s).
We have had countless numbers of clients impacted by this nasty little clause. One gentlemen sold his business, and while he was on holiday the bank took the proceeds ($1 million) in his bank account and applied it to his mortgages.
Of course there was nothing he could do about it as it was all perfectly legal. Thanks to this beastly verbiage this man – who was 65 years old – is out money he had counted on having.
To avoid this kind of heartache yourself, read your contracts with a fine toothed comb – making sure there are no “all monies” clauses. If you find one – or God forbid several – speak with your personal finance professional about getting the clause(s) removed – before you face a similar situation.
Mistake #5: Co-mingling business and personal finance
Simplify your accounting by keeping your personal, business and investment property savings separate. Rather than establish a redraw account for your business and attach it to your personal home, withdraw the money and “lend” it to your business.
When it comes to finance, remember the K.I.S.S. principle – Keep It Super Simple and keep your accounts separate!
Mistake #6: Failing to comprehend what makes Principal + Interest different from Interest Only
Your choice between the two comes down to your particular situation. A mortgage which is principal and interest will pay down your mortgage, however it puts a pinch on your ability to buy another investment property. This kind of a mortgage works best when you’re in the consolidation phase of property investing and are looking to pare down your investment holdings.
An Interest Only mortgage works best when you are attempting to build up your portfolio as it delivers the best bang for your buck in terms of serviceability. In other words, you’ve got more money to pay the bills, so to speak!
You’re paying out a lot of money when you buy an investment property so it’s crazy not to understand what you’re doing. Get informed before choosing your loan type.
Mistake #7: Not using an offset account
One of the best ways, by far, to boost your financial situation which can allow you to pay off your mortgage more quickly, and achieve your financial goals that much sooner is to use an offset account.
Set up as either a transaction or a savings account, an offset account is linked to your home loan. Every bit of money you put into the account offsets the balance in your loan account, which equates to less interest coming out of your pocket. I don’t know about you but I LOVE paying the ATO taxes…not!
Seriously though – you can shave thousands of dollars – and years – off of the life of your mortgage. While this is an absolutely fantastic way to manage your finances, want to know what’s even better? You are ALWAYS IN CONTROL of your extra cash, so if you need to pull out a few, you can certainly do so!
If you need help or more tips about your Property Investment strategy, book a FREE consultation with one of our expert Investment Coaches to discuss your situation and investing goals.
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