High equity, low income

Question from John updated on 1st February 2012:

I have a lot of equity but my income is low. I would like to continue to build my portfolio but banks refuse to provide me any more funding even though my portfolio is very cash flow positive. How can I keep moving forward?

Our expert Kris Pedersen responded:

Firstly to explain why you are having servicing issues as investors when looking at a properties performance we look at it like doing a basic profit and loss sheet. Rental minus expenses and then whatever is left over (if there is anything) is the cash flow to service additional debt or to live off. Note however that lenders work differently. Depending on the lender they immediately shave 20-25% of the rent off to create a safety buffer. Then on the mortgage side they tend to use higher rates than what you will actually pay to assess your servicing and will always run their numbers based on principal and interest even if you pay interest only. Note also that if you have a large portfolio and are dealing at business or commercial level then they use measures, which are even tougher. With banks being a lot more restrictive on the cash flow requirements than they were in the 2004-2007 period we have seen a lot of clients move into joint venture situations. There will be many people out there who are in the opposite situation to you potentially having a high income earning job but no equity and often these people can be quite time poor. By combining forces you can both achieve things that you can’t by just yourselves. Note that the structuring in regards to this is quite important. Many times people believe that both parties can go shareholders however this can have some negative implications when borrowing so make sure you get the correct advice.

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

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