Financing: things that your banker won't do

I am sure you have all heard the saying: A banker is someone who lends you an umbrella when its sunny, and takes it away when it starts to pour! Well, although we can all laugh about this, but at the back of our minds we all know its true. Look at it from their perspective: most of the bankers are only rewarded with bonuses if they do well but if the loans they give turn bad, they will lose their jobs. So, you can say that their risk -reward ratio is a little skewed towards being conservative.

In any case, we need the bankers, as that's the only way we can get leverage. Otherwise how are you going to acquire millions of ringgit worth of rental properties? certainly not by deploying your own cash. So, we need to know what bankers' rules are and play by or around them.

4 Things Bankers won't do:
1) they won't loan you money when you really need it.
That's a fact. Try going to the bank and asking for a loan when you don't have a job or a pay slip. The banker would smile and promptly show you the door. So, having a pay slip helps: the bank will loan you a percentage of your gross salary and this can range from 60 - 85% depending on their risk appetite (also known as DSR or debt servicing ratio). So if you earn 10k a month, the max in terms of monthly repayments would be up to 8.5k. You can then work backwards and figure out how much properties you can buy.

2) they won't give you 100% of the purchase price
The bank wants you to have some equity in the property; some 'skin in the game', as they say. So it won't be so easy for you to walk away if things turn bad. But sometimes, you do get crazy situations like in the US prior to the subprime crisis where the banks were giving away loans which were way above 100% of the property value, and to people who could never afford it (even if they repaid it in 2 lifetimes!). But in most cases, banks want you to have at least 10% equity if its owner-occupied or 20-30% if its not. So, if you are looking to finance your rental properties 100% - see my earlier blog on "no money down".

3) they won't loan you more if you don't pay your instalments promptly
It is important to maintain a good track record with the banks on your existing loans. Being a little late in paying is acceptable but not behind in your payments. If you don't pay them after 3 months, you get black listed, and the bank may start legal proceedings to recover their loan. You may lose your property if they move to foreclose. But more importantly, this sort of thing may affect your ability to borrow more, to finance your rental properties portfolio in future So, make sure you are on top of your instalment payments - its just good business.

4) they won't make a decision fast enough when you need the money
Yes, if you are looking to buy a really good piece of property, and need to close on it fast, then the bank is not the place to go. The banker is in no hurry to loan you the money; they work at their pace and not yours. I have never met a banker that has the same urgency as I have when faced with a super deal. So, in such situation, you need to have some back up financing. Borrowing from family and friends, or finding other equity partners may be better alternatives. And, then later financing it through the bank. That way, you are more likely to close on  a good deal. Much less stressful than praying for the banker to come through with the loan when you need it!

Well, those are the four things I have experienced with bankers. Let me know if you know of more.

Chris    

copyright Chris Gan@2010, www.breadnbutterproperty.blogspot.com

Finding Financing for Your Rental Property

A very important part of investing in rental properties is the ability to leverage. And that means having to borrow from the Bank. There is good debt and of course, not so good debt. As mentioned earlier, leverage is good because you are able to multiply your returns with a small outlay; for example, if you finance a 100k property with a 10% down payment, and if the capital gains when you sell it is say 20k, then your return is not 20% but actually 100%. The cash outlay was 10k and your returns was 20k (100%). But remember, this can work only if your rental income can more than cover your monthly instalments.

As such you need to look for appropriate financing. And, having a group of bankers which you can tap on for funding is important as not all the Banks will be interested or focus on your property segment especially if its 100k or below. Some banks just don't want to do these 'bread and butter' properties - they may think it's too high risk, when in reality its probably not. 

It's often said that "bankers are people who offer you can an umbrella when its bright & shiny outside, but will take it away when it starts to rain!" That's a bit extreme but I would also add that bankers are like everybody else: they are motivated by fear, and also greed. They are in the business of giving loans, and the more loans that they make, the more the banker makes as commission. So, don't be shy to approach them to finance your rental property; they worst thing that can happen is that they say No, in which case, just move on to the next one.

Firstly, check out a few banks -  maybe one or two local and one or two foreign banks to start with. Ask some friends if they have friends who do loans. Referrals are a good way to find the good bankers. Don't assume that all bankers will do loans; some focus on other areas like wealth management only.  Call them up and ask what the bank's offerings are, in terms of rates, margin of finance (MOF), tenor and if there's any special packages like zero cost (for loan agreement and valuer's fee). Next compare, the offerings; not just the cheapest rates but also, the MOF they are willing to give. And also service; there are some banks that I would not take a loan from because they can't get their act together, usually causing me more money in the long-run in terms of delays, etc.

Next, once you have identified a few bankers you want to deal with, ask them what they need. Normally the documents required are:
- copy of yr IC,
- Bank statements for latest 3 months,
- Salary slips for latest 3 months,
- your tax return (sometimes),
- details of property i.e. copy of the offer to buy & sales and purchase agreement, if you have.

I would always make many copies of these, and submit applications to two or sometimes three banks for the same property. It doesn't take much more work than submitting just one application. That way, I am always sure that I will get financing for the property as time is ticking; you only have 90 days to sort this out from date of signing your S&P. So you don't want to be left hanging with no financing; it's better that you reject 2 offers than having to accept the one and only, with terms which are not favorable to you.

In order to leverage my time, I would usually ask the bankers to come to see me, rather than the other way round. That way it saves me travel time and also tells me that they are serious about doing my business. Other ways of saving time would be to use faxes and also courier (Poslaju) to send some of documents: meet face to face when its absolutely necessary.

Lastly, know this - not all of bankers would want to do your loan, for one reason or another. Sometimes, it's because of bank's policy for example, not wanting to finance properties below 100k, and so the rates offered may not be attractive. Other times, the banker is not interested to do "small" loans. Don't be disappointed if you don't get a quick reply (or no reply at all) on the status of your loan. Often I wonder if they were even submitted in first place! That is why, you should have a few bankers you can call on, and submit more than one application for loan for each property.

Once you have done a few loans, and dealt with a few bankers, you will be able to identify those that can be part of your team.

**
Chris