Serviceability: Why I Never Sell – Part 2

A few weeks ago, I released this article titled “Why I Never Sell”.

Following that post, a few people messaged me asking specific questions about my strategies and tactics. We also had a number of calls with people who reached out for a chat about their own circumstances.

So this week I thought it might be the perfect opportunity to go into some detail and maths regarding options if you are building your portfolio and are faced with decisions where you might be facing having to sell property.

Note: This post contains advanced strategies and is more detailed than my usual blog posts.

I admit, it’s more advanced and for people who are already building portfolios, though even if you haven’t quite got that far yet for yourself, it’s great education. Arming yourself with knowledge is always going to prepare you for eventual battle… so to speak.

So here’s a question I was asked after the last email:

Just of interest (not certain if you can avoid that pun while talking property), is there a point when the finance providers won’t release equity – can they be forced to; or is it still all based on serviceability?

Great question.

Here’s my actual reply to this email:

We’ve had a lot of similar responses and so I might actually do another email on the below – a process that I’m going through at the moment.

Serviceability is a major issue with refinancing these days and that’s what property investing has turned into – 90% of a game of getting money from the bank for either continuing to build your portfolio or access to equity to live off.

One alternative strategy to consider is to try and get banks to release properties debt free.

    • Let’s say you had 5 x $1m properties at 80% finance ie $4m debt
    • Over time those properties double in value to $2m each x 5 = $10m and so now you’re only 40% geared
    • In an ideal world you refinance to 80% again and have $4m in your redraw account $10m x 80% = $8m less $4m already owed = $4m

However if you don’t have the ability to service $8m they won’t lend it to you.

If you sell one of those properties for $2m then the bank may require you to pay off that original related mortgage of $800k which means you only get $1.2m net proceeds from the sale, less tax of $250k ($1m capital gain less 50% CGT discount x 50% tax). So you only end up with $950k.

There’s an argument to say that the bank only needs $5m of security for your $4m original loan, not the $10m current value and so there’s a chance they will release $5m of property debt free and give you back the title deeds. They probably won’t do it if you say you’re going to sell a property as that would reduce the income you’re using to service the $4m debt but if you say you’re doing it for asset protection / diversification reasons that may give you a better chance.

So then you have your original $5m of property with the bank and your 80% $4m loan.

At a later date you may then choose too refinance or sell.

With that $5m of debt free property you might be able to go to a 3rd or 4th tier lender and get a 10%, 20% or 30% no doc loan at very reasonable rates as the risk is very low for the new lender.

If that’s still not possible due to serviceability constraints then you could sell one.

But this time you get the full $2m proceeds as those properties are debt free. You still pay the $250k capital gains tax but now you end up with $1.75m cash rather than $950k.

One of my friends has done this a couple of times and I’m currently going through this process now. I still have no intention of selling one unless I really have to, but at least it will give me flexibility in the future.

As always check your strategy with your mortgage broker, accountant and/or financial planner before taking any action.

I hope this gives you some more options and as you can see, not all buyers agents or mortgage brokers are the same and so I suggest using ones that have got the results that you yourself want.

Do you have thoughts? Comments? Have a high level chat with our strategy experts at Your Empire as we’re happy to talk anytime. Click here and organise a chat now.

Additionally, if you have any questions about serviceability and how it affects your investment strategies, feel free to bring them up during our chat.

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