Sometimes, as property investors, we can find ourselves with a bit of spare cash on our hands. When we do accumulate cash or equity surpluses it can be difficult to put them into direct property, due to the Bank’s servicing criteria.
Rather than spend it or let it sit there doing nothing, there are better ways to get more from your money.
Often people turn to development because development finance doesn’t always rely on your personal capacity. Investing in developments can offer potentially substantial returns that can assist to create chunks of profit that can be used to paydown debt and create a better picture for the banks to continue to lend against personally. But with development there is always a balance of risks with the amount of dollars being spent and the they’re invested versus the return on the investment.
Timing is the biggest risk factor in developments, with the time taken on similar projects often varying from as low 6 months up to a high of 36 months depending on how quickly Councils and bureaucracy move.
Another strategy would be to invest in income-generating products which will help you generate more income which helps increase our debt-servicing capacity which the banks look at closely when evaluating whether we can borrow for another property. Also by establishing a history of cashflow, which can take up to 2 years for the banks to accept, you can accelerate the growth of your portfolio more rapidly by utilising the banks money more often.
Assessing your options for what you can do with some spare cash and how it may affect your property investing plans, gives you some of these options:
- Fixed Interest products – these usually don’t keep up with the mortgage rate so you are better off leaving money in your line of credit.
- Direct shares – not our expertise but banks are generally OK with major company dividends.
- Managed funds – as above but generally with a more stable return through diversification.
- 1st Mortgage lending – secured by real property which can be a safe bet but returns are relatively comparable to the costs of funds (LOC) unless you are offering high LVR or servicing riskier homebuyers. Also generally requires a lot of spare capital as the lending is for the majority of the purchase and timing is generally longer term.
- 2nd Mortgage Lending – again secured against real property and generally has the comfort that one of the major bank has also invested in the deal. Usually much smaller amounts and higher returns that can create a good income after repaying any costs of funds. Generally short to medium term investment horizons.
- 3rd Mortgage (Mezzanine Finance) usually required by developers to assist in funding the shortfall between their cash input and the bank’s offer of finance. Provides an opportunity to get involved in development type returns but with the security of standing ahead of the developer when the profits are distributed. Usually shorter term or with a known estimate of the project end date. This finance can be structured to provide a regular interest repayment (income strategy) or a lump sum profit share on completion.
For me, whenever I find myself in the situation of having some cash available I tend to take the following approach.
As a property investor looking for a return on my spare cash, I invest in developments using the 2nd Mortgage and 3rd Mortgage strategies or a combination of the 2. This keeps me exposed to property, which I understand☺, and also gives me a secured position which helps provide some protection for my capital. By investing via a loan or a mortgage fund I can also get regular income which will help me buy and build even more property of my own with the banks help.
If you want to find out how some of these strategies might work for you please feel free to contact me at firstname.lastname@example.org