4 Strategies to Unlock Borrowing Power and Scale a Portfolio

Four things that people can do, it can make or break a portfolio. For number one, we've got the world of SMSF. SMSF is a massive opportunity. People have so much borrowing power that they didn't really know about. Two, personal liabilities.

This is probably the first thing you can look at to improve your borrowing power because it's something you can change quite quickly. Number three, structuring. It's a very good way to preserve your borrowing power and to provide options with regards to going into an owner-arc or transitioning into commercial. Four, the final one, different tiers of banks and different policies. There are some game changers here that people just don't know about.

Too often I see people miss out on growing their portfolio more than what they thought they could. In this episode, we're going to talk about four ways to unlock your borrowing capacity and continue to grow your portfolio. Let's get into it. Nerd alert! Property nerds, the home for data-driven property investors, where we uncover Australia's hot and cold markets, latest headlines and trends.

Welcome to another episode of the Property Nerds podcast, guys. And Jack, thank you so much for today's intro. We're talking all things finance. And as we know, the world of finance, yes, strategy plays a key part too, but those extra X factors from unlocking a bit of borrowing capacity, it can make or break a portfolio. Like you could be needing four to hit a certain goal and you might be at three.

And that next one is the difference between maybe five, six, seven years of holding time or having all the assets you need to hit a goal. So Jack, I'm really keen to pick your brain on these four ways or four things that people can do when it comes to unlocking their borrowing capacity. For number one, we've got the world of SMSF. Why and how does SMSF actually even unlock extra borrowing capacity? Yeah, so if you've got a portfolio outside of SMSF, you're obviously using your normal PAYG income.

Your super contributions aren't taken into account when looking at your borrowing power in that regard. So with SMSF, you've got your 12% mandatory contributions from your employer. All of that goes towards servicing an investment portfolio within that other entity. So yeah, it can unlock, for some people, it can be a million dollars worth of property. So that over a 20-year period is life-changing.

So it's not whether or not you should do your SMSF or not. It's a combination of both because if you do have a good SMSF strategy, it's going to influence your decisions when you're in retirement. So SMSF is a massive way that people, it's a big opportunity. People have so much borrowing power that they didn't really know about. It's right there.

Yeah, so I'm going to make it real simple. But before I do, I just want to make sure I'm getting this understanding right. So essentially what we're saying is borrowing capacity is going to be separate in the SMSF because it's relying on contributions and rental income. Is that part right? Yeah.

Yeah. Okay, cool. And then that means that hypothetically, if someone says, spoke to Adrian and the team in strategy, had four properties, and maybe they haven't deployed the rest of the tips from today, but let's just say they're now maxed out. Yeah. And if they did have the right super balance, obviously the right financial advice to say, yes, it makes sense for SMSF to be a vehicle in the journey.

And then they were looking at their borrowing capacity, it would be completely separate to what's in personal. Yeah, your personal assets and liabilities in most cases wouldn't hold any sort of, wouldn't hold you back in regards to your borrowing power within SMSF because again, your super contributions that are mandatory, that are already being paid by your employer, that's not being used to service your debts outside of super. So it's money that's already going to super, that can service the loan repayments as well as the rental income. Yeah, got it. Now, Jack, I want to ask, when it comes to super, there's obviously the contributions the employer makes.

Yeah. What about if you're in a position to make extra contributions? Does that improve your servicing? How does that factor into things? Yeah, so that's when your personal assets and liabilities can affect your additional borrowing power in super because there is some level of additional or proposed additional contributions where they do look at your assets and liabilities in your personal name.

And that can, you've got your mandatory contributions, but if you wanted to allocate a certain amount of additional contributions, then they can look at your assets and liabilities personally to see if you have capacity to make those extra contributions. And if you're self-employed as well, and you're like your brand new self-employed, there's a lot more flexibility in regards to proposed contributions because obviously you've just started a new business, you wouldn't have contributions going in maybe if it's the first 12 months. Well, that's actually a big one, man, because many business owners, even in like non-SMSF, they make this mistake or they make this thinking like, oh, I haven't been in business long enough. I've only been in business for just kicked off. But like what you're saying is, hey, I know it's just kicked off, but at the end of the day, if you have certain checks and things that can be passed personally or contributions that you can make, the bank's still willing to entertain SMSF lending for you.

On prime rates and like you'd look at if you're a brand new business trying to get a loan, like as a low dock or an old dock, they'll take you for a ride. There'll be risk fees, there'll be high rates. No one else is giving you money, we'll charge you a lot more for it. But in SMSF, for some reason, they're quite happy to give you prime lending, really reasonable products. And that's for brand new self-employed.

So it's pretty interesting. Now, Adrian, you see a lot of portfolio plans when it comes to the world of SMSF. Is it becoming a lot more popular than usual? Is servicing playing a big part in it? Yeah, it definitely is.

I think nowadays that we are seeing people come and build their portfolios, not just making their first purchase, but doing multiple purchases. As they continue the journey, like you said, if they haven't implemented some of the other steps, they do naturally get capped out a little bit on the borrowing side of things. And then you sort of look what you can sort of shuffle and do within their personal. But then you also have this great opportunity within SMSF that if they've got the balance, if they've got the strong income coming in, it's another way that they can just really expand the portfolio. And like Jack said, it doesn't have to be sort of this completely separate thing that you look at.

You can do your personal or you can also do your SMSF on the side and they can go in parallel. So we're seeing a lot more of it, especially given interest rates have increased, borrowing capacity is getting a lot harder. The other side that we probably haven't touched on is the cash flow side of things, where people naturally, as they borrow more debt, it gets harder for them to... And given this money comes out of contributions, it doesn't really affect their personal cash flow as well. So a lot of people are definitely exploring it and really charging along to get that extra one or two properties in their portfolio.

That's actually a big point because if it's like on the cash flow side, we forget whilst we are in lower ring interest rate environments, we're still at high interest rate environments. And so if someone personally is unable to service that and they don't want their lifestyle to be heavily impacted, contributions, rental income, separate entity from pre-tax income that's not flowing through to your everyday lifestyle, that all servicing and holding it, plus a certain buffer in case you've got a deposit in the SMSF though, you're not using all of it for the purchase, there is leftover buffer. I can see the attraction behind so many people wanting to do it because it's like, I want to use leverage, I want to buy property, but I don't want to impact my lifestyle. Yeah. I think obviously when the rates were going up pretty quickly, I think that forced people into investing with their SMSF because they hit their borrowing power limits, but while it took a bit of time for the banks to adjust their policy to allow people to borrow again.

But also when people get to a point where they've bought multiple properties in the last say 12 to 24 months and they're in a period where they're like holding, so I'm not going to do anything for the next six to 12 months due to lack of equity or just in a period where they're just holding, a lot of times they would look then, so in the meantime, maybe I'll just do something with my SMSF. I do see that come up a fair bit. Yeah, a really good point. Now, Jack, when it comes to SMSFs, I also want to understand one more thing, the cash required. Now, people seem to think that you always need a 20% deposit, but if I'm not mistaken, there are some lenders who are also doing 90% SMSF loans, meaning you can now diversify your cash in more ways because you're not putting it all towards property with the less deposit, or you can put in offset accounts, or you can look at having a bigger buffer.

Does 90% exist in SMSF residential lending? It does. It's mainly for high income earners though, because it's kind of restricting you in the way that you can allocate proposed additional contributions. It's more like your mandatory contributions, and there's still no liquidity requirement, but yeah, there's less flexibility in regards to improving your borrowing power. That's why it's pretty much got to rest solely on the mandatory contributions.

And yeah, I mean, we do it. It's really a lot of times when you And then there could be this pathway they follow to set themselves up. Like it could be literally year two, two investments, year three, final investment. And in three years, they've set up the trajectory for their financial future when it comes to their wealth that they're wanting to build and the end long-term passive income. But in comes this, we call it the little gremlin, right?

From our little end of financial year catch up we had and learning about the thoughts in people's minds. Buy your home. Stop the investment. It's now time to get the home. Otherwise, Sydney's going to get pricey.

Don't do that. Don't reinvest. These voices come up and conversations shift, timelines shift. What's the impact to that on a portfolio? It can have a pretty big impact, honestly, because when you think about what you're doing financially, if we talk about the PPL, it's always the emotional decision.

That ultimately is what it is. We can talk numbers and everything like that. But if someone wants to buy their home and they're set on that, then it's an emotional decision. What we can do is sort of talk about the financial implications of what happens, which is usually if we're talking Sydney-siders especially, high price point, very expensive, massive loan that they have to take out given they've only had a year or two building up their portfolio, they're going to use all of their savings, equity, borrowing capacity on that one purchase and they're going to get stuck. And it might not work out as good as they thought because I've had clients that when rates were 2%, they bought a $2.

5 million property at 70% LVR thinking, oh, here we go. And then rates go up to 5. 5%, 6% and they have to sell anyway. I've seen that so much, man. Yeah, yeah.

And they wouldn't have had enough time considering stamp duty. Even if it grew a little bit, stamp duty would have been almost 150K plus. So it's like that's used up a fair bit of chunk. And then selling it, it could have been 300K in transactional costs just from like selling it, stamp duty, taxes, anything like that. Maybe not in their home and the taxes, but at least 200K plus in transactional costs just to like get in, get out for something that's not long lasting.

I always think like we actually had Danny, a case study of ours, in terms of a client who's been on this podcast and shared her journey. And I always say these two things. Number one is four to seven years of hard sacrifice to build a portfolio between three to five properties could game change your entire financial future. And that is a live example. Just go and check out her case study and see her journey, her story that she shared.

She'd bought a property in Brisbane, Adelaide, regional New South Wales and regional Queensland. Three and a half million dollars in assets over a four year journey with us. That was her saying no every year to this. I'm going to get this home. I'm going to go and get this property.

And both her and her partner, Ron, when the capacity go and do that. But they're like, no, just four years of hard focus. Now you take that three and a half million of assets, you compound it out. They're both in their 30s. So you take it out to their 60s.

You look at their growth journey of super, which isn't something we advise them on. The super is their journey, right? But super property, personal incomes, everything. They put this together. And all of a sudden they're like, wait, we're happy.

We're content with this. This gets us our long term income. So what do they do? They drew a line and they're like, I'm going to focus on my home now. So now instead of going, which leads me to the second point, instead of just that four to seven year sacrifice, let's not think of just how tough that will be.

But just think of going now for the rest of the working life or the rest of the family life and deciding what you want to do. You just have one thing to focus on. That's the home. You know, whether that's in different cities, different locations, try before you buy as a rent investor. It's just an isolated focus on finance rather than you asking yourself this question.

Would you like to catch up on your income and wealth goals or would you like to catch up on one home? One home. And everyone asks that question that goes, I don't want to catch up on my income and wealth goals. I don't want to be in my 50s wondering if I'll be OK with my 60s. I want to know in my 20s and 30s that I've set myself up and I'm going to be OK in my 60s.

Now let's go have fun, travel, lifestyle, maybe pursue that job and career that you were thinking of that you wanted to, but you thought the risks behind it were a bit too high. But that's OK. I'm set. I'm OK. I'm going to go for it.

So it's just amazing what that personal liabilities thing that we're talking about, that sacrifice, that tighten the belt. It doesn't have to be two minute noodles. But actually, look, if you pop a fried egg, a couple of spring onions, you know, some fish flakes, whatever you do, chuck that on two minute noodles, a five star noodles, Michelin star. But, you know, that's probably as bad as it'll get. But everything else, when you cut well, sacrifice for four to seven years, you build plans for days and you see this, you're like game changer.

But that's number two. Number three, structuring. Very technical and fancy world. But give us the actual just summarized version of this. Yeah.

So, I mean, for most investors, I guess borrowing power comes up as a problem for a lot of them. Structuring is basically not buying things in your personal name. And this could be very impactful for people that don't have their own arc yet, but want it in the future. But buying something in a trust with a corporate trustee, it's going to give that flexibility to preserve their borrowing power in their personal name for when they do want to buy that property. That's a very common scenario that we see.

But also, if you know that you're buying these residential properties and you're one day going to exit out of them to enter into a commercial property, then there's some tax advantages on the way out of selling residential portfolios that are owned in a trust. So there's a lot of, it's a bottomless pit of strategies when you talk about buying properties within trust and what it can provide you with preserving your borrowing power in a separate trust or in your personal name, transitioning into commercial property, saving as much money, not having to pay too much tax. So yeah, we could have a whole episode dedicated to that, but it's a very, very good way to preserve your borrowing power and to provide options with regards to going into an owner-arc or transitioning into commercial. On the trust structuring part, or just structuring in general, this is another thing not to rely on the bank or your bank to speak to or your majors to speak to, because their policies, not all of them have the same policies that allow for it. So it might just be like, woof, not normal to them.

It really needs structured investment specialized brokers. I mean, I know that's the case because we've had clients that are bankers and they have no idea what this is all about. They would know what their bank's policy is, but from a strategic point of view, what it all means, it's just not told. I mean, it might not also just be bankers. To be honest, I've talked to a lot of brokers who also don't know about it.

A lot of brokers don't even know. I mean, Adrian, one thing coming back to Danny's point though, is that you need to also be clear about your goals. Because in her case, she knew that four properties was going to do it and they don't want to have a whole bunch of properties, right? They want to know that they're set. And then if they choose to later on, they can.

So for them, the four in personal names, they felt made sense because there was the gearing, there was the deductions, there was the high leverage, there was the lowering in costs, and that they knew they wanted to cap off at four. Would you say it's more like a strategy for those who actively and knowingly want to build an aggressive portfolio rather than just every single person go and do this? Yeah, when it comes to structuring, there's always the intent or the plan that you have to keep in mind. You'll notice like what Jack was saying, it was, you know, this is great for investors who do this, such as, you know, purchase resi's, go into sell and then go into commercial, or this is for an investor who is looking to eventually purchase a home where buying capacity is an issue. So you notice everything he said is always talking about the future, the future plan in mind, and that's very much how it is for structuring and trust where you have to have that conversation of, you know, if I'm talking to someone who goes, hey, you just need a purchase too, you'll hit your goals.

There's no point going into a trust, you're just creating unnecessary structuring and fees that they have to pay for no benefit. And that probably would put them in a worse position. But for a lot of people, as you've mentioned, for aggressive investors, for people who naturally go throughout their journey and they do get capped within borrowing capacity, and that becomes the one limitation to them actually getting to their goals, it's definitely necessary. And that's something that needs to be discussed if they're actually trying to reach that goal there.