Getting into debt to get out of debt
My biggest motivation right now is to recover from the financial disaster that became my life a couple of years ago after the collapse of my business.
My business failure left me more than $200k in the hole, and it's taken me more than 2 years to get close to a position where I can say we feel somewhat financially stable.
We were incredibly fortunate to have moved into employment where we are paid a comfortable income. And this has contributed massively towards our fairly rapid recovery. But, I'm extremely motivated to fast track this recovery. And real estate is a great way to do that, if only I had the funds to get into that space once again.
And with motivation comes opportunity
I often speak with my bank about how they can help me get ahead. There's many ways that they can help. And they unsurprisingly don't share these strategies openly (such as removing meaningless or excessive fees on accounts). So, more often than not, these conversations hit a brick wall. But this virus thingy that is currently ravaging our planet brought with it some extra motivation for banks to "help" people who needed it.
So I spoke to my bank and told them that I needed a reduction in interest rates. Their response was to have me refinance my one remaining investment property and so I commenced the process. I'd only had my property valued a year ago, so felt confident that the refinancing would not only give me a lower interest rate, but also give me some equity to play with. I might even have enough to use for a deposit on a second property. Maybe we could live in the property so that we can stop renting. Or perhaps I would get enough equity to consolidate my remaining business debt.
Unfortunately, however, the bank valued my property at a lower value than the value given to the property last year. This made no sense. I know the values of properties in this suburb, and they have only increased in recent years. It's possible that this damned virus has impacted bank property valuations, however not by this much.
I got frustrated, and explained to my bank manager that I'd speak with other financial institutions. And promptly found myself a local mortgage broker.
Dumb luck doesn't happen often
My mortgage broker seems to like testing boundaries. She requested a valuation of my property at about $150k above what it should have been valued at via a different banking institution. And had the valuation accepted...
This was quite literally dumb luck. There was no reason why this valuation should be accepted. But this different bank seemed eager for my business. And even better, the new (and highly exaggerated) valuation would let me do some very useful things:
- I could refinance my investment property to new and much lower interest rate.
- I could consolidate my remaining business debt into my investment property loan.
- I would have enough remaining capital to put down a deposit on a home for my wife and I to live in with no cash deposit needed.
Even better, the cheaper interest rate that we'd have on our home loan would require payments less than we're currently paying in rent.
More debt but better off financially
The fascinating thing about all of this is that through getting into even more debt, we're actually freeing up about $2000 per month in cash flow. We're essentially better off while increasing our debt to more than $1,000,000.
But even better, we get to move into a home that we "own" rather than renting.
The home won't be forever. This new property that we move into will be for future rental. I'm looking for a place that:
- needs a little (and I mean little) renovating.
- needs a new garden.
- and is in a location where rentals are in high demand.
I'll spend 2 to 3 years doing up the property with view to turn it into a positively geared rental. And over that time we'll build enough equity to buy the house that we really want to live in.
Ultimately, the goal is to build a small network of rental properties, with most positively geared and providing a semi-passive income stream. I have an initial target of having 5 properties under my belt, however it's quite possible that I'll go beyond this number.
But first things first. We need to convince the bank that my first property has magically gone up in value by $150k in the space of 12 months.
