Divide and conquer with a revolving credit structure

Question from Richard updated on 14th December 2011:

We have two investment properties, with Bank A for the past 4 years, which are locked up until 2014 with a low interest rate and are are security against each other. Now we have cash deposits for properties 3 and 4 individually. I don't want to make the same mistakes we have made in the past with Bank A, so as a start we plan to buy Property 3 with our first cash deposit. I need a way of splitting and working with Bank B to set up the first mortgage structure so when I go back to get it revalued, in say 6-months time, I can pull out all equity leaving a mortgage of 85% of RV on the property. I don't want to then use this equity as a deposit on the next property which is what we did with Bank A. Rather the equity should go into a credit line or similar so we can pull it out up to this value for future property investments. I will also do this with our other cash deposit. Can you confirm the best approach here?

Our expert Kris Pedersen responded:

My preferred structuring set up is as follows: Have one bank who you will use as your 'equity safe haven' bank where you will look to have your revolving credit. The idea over time is to have as much equity in this property as possible and will generally be your owner occupied property should you own one. You then have a revolving credit facility in place here from which you will take your deposit funds from. You don't purchase any investment properties through this bank. You then use other banks to complete investment purchases.

As you will be aiming to get these properties at a discount you will then revalue against registered valuation as soon as possible to pay back the deposit to the revolving credit facility and go again. For example: Bank A 1 Smith St Value $500k Mortgage $200k Revolving Credit Limit $200k Balance $0 ($200k still remaining). You purchase a property for $300k at a 20% discount to what it is worth (so the property worth is $375k for example). You would take $60k from your revolving credit facility and $240k from a second bank.

As soon as possible you would top up with Bank B and assuming the property was still worth $375k then you should be able to pay the revolving credit facility back in full. You have now effectively 100% funded the property with Bank B, have your full deposit funds available with Bank A and just look to repeat the process as you go.

Kris Pedersen of Kris Pedersen Mortgages is a commentator on property and finance. His team sources top finance strategies. www.propertyfs.co.nz

Search the Ask an Expert archive

Browse all questions in the Ask An Expert Archive »

Site by PHP Developer