Pre Approved Loan - The First Giant Step

Getting a pre approved loan is the first step towards buying your first investment property. This will put some basic structure to your plan. You will need to find a lender that suits your need and is willing to give 'in writing' that they are willing to lend you money to a certain amount to fund your purchase.

When I was starting out my mind was full of questions as I had very little knowledge about financing. I learnt through trial and error and at times with great cost. I will try and answer some the questions that will help you understand the basics of financing as you apply for a pre approved loan.

Q.  Why do I need to get pre approved loan?

Answer - You can bid for a property without applying for a loan. I will highly recommend that you get a pre-approved loan for the following reasons:

A. You will know exactly what is your budget. This will allow you to focus on properties in your price range and save valuable time.
B. A pre approved loan will give you the confidence and head start over other buyers competing for the same property.
C. Vendors looking for quick sale, at times, will sell property at a lower price to a cash buyer. They will raise the price for a buyer who puts too many conditions for the sale.
D. It will keep your stress level down as there is nothing worse than putting a property under contract and then wait for the bank to approve your funding. In some cases you may lose your earnest money if the bank does not approve the loan.

Q.   Should I use a Mortgage Broker?

Answer - The answer to that is an emphatic yes. A good mortgage broker can save you time, energy and effort. There are so many banks and different types of mortgage products to choose from. Mortgage brokers deal with banks every day and will know which bank and what type of loan will suit your need. You also need to give your financial information only once to a mortgage broker. They will present your information to the bank in a most suitable manner. The best part is that you don't even have to pay the mortgage broker; the banks will do so on your behalf.

Q.  What type of loan should I take? Is it advisable to take an Interest only loan?

Answer - Generally speaking property Investors use Interest only loans.  This ensures that your monthly payments are low and as a result cash flow improves. You also get increased tax refunds as interest payments are tax deductibles. There are no tax deductions allowed for payment of the principal amount. This further improves your cash flow. This will help you get finance for your next investment property as cash flow is a very important criteria for bank lending.

How will you make money if you never repay the loan? Your equity in your property will increase with time. This is a historical fact. Professional investors do not increase their equity by repaying the loan. What this means is that they will never own the house outright. They use their increased cash flow to buy more property and thereby gain more equity over to increase their net worth and become wealthy.

It is advisable that you speak with your mortgage broker and accountant as tax laws can differ in your country or state.

Q.  Should I take a variable interest rate loan or fix it?

Answer - I have one simple advise to this question.  Fix your loan as soon as you see banks raise long term interest rates.

Q.  How much deposit do I need to save to buy my first investment property?

Answer - This will depend upon your situation and external economic circumstances.  Generally banks insist on a 20% deposit. This amount can increase or decrease depending upon the state of the economy.

Professional investors will always try to use least amount of their personal money and pay as little deposit as possible.  They try and fund their property with close to 100% loan if they can get it. This is called leveraging. You have to be careful as excessive leveraging has its risks. You should have the capacity to service the loan if things go wrong. This will depend upon the cash flow from the property, expected vacancy rates and your personal financial situation.  It is always better to err onside of caution when starting out. As you gain in confidence and your portfolio grows you will be able to buy properties with lesser deposits.

The most important thing is that you must act. I have seen people with deposit wait to find out if property prices will decrease before they make their move. In 90% of the cases property prices will rise making your deposit worth less than what it was 6 months a ago.

Always remember the good old saying 'Never wait to buy to property. Always buy property and wait'. The best time to buy property is NOW. Getting a pre approved loan is the first step towards buying an investment property.

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