So day 16 of our 21 days property investing.
We're going to be talking about cross security.
Now if you're going to be building up a property portfolio, it's
really important to understand how your properties are used
as security for the finance you need to build that portfolio.
So when you have multiple properties
that are joined together for finance purposes, it's called cross security.
So let's say you've got your family home, you've got a bit of equity there
and you're going to use that equity to help you buy an investment property.
Now, if you're going to be using the same bank, generally speaking,
those properties are going to be tied together in a cross security
and that means that if anything happens with one of your properties
or you stop paying your mortgages, the
for whatever reason,
you know, maybe the rent doesn't get paid or you lose your your income,
then the bank can actually claim on both properties
to recover the money that they've lent you.
So cross security, especially in sophisticated property investment circles.
And you'll hear a lot of like media hype
about why cross security is a bad thing.
And generally speaking, if you can avoid it all things held constant
it does make sense to try to avoid cross securities by using multiple
different banks and what that means is if you sell properties in the future,
that only the debt tied to that property at that bank is required to be paid back.
So it gives you the ability to keep the cash from those sales.
If you sell a property that is cross secured,
whether you get to keep your money, that is in question.
Now that's why cross security gets such a bad name is because
property investors that potentially not working with mortgage
advisers are just working with the bank and usually just with one bank,
they've sold a property without talking to the bank first,
thinking that they're going to get this big windfall of cash that they can go
and deploy to other investments or other lifestyle decisions.
And what ends up happening is the bank keeps that money.
And I'll take you through that scenario here.
What you've got to remember as you are building up a property portfolio
is that cross security, whilst it has a bad name
and it can be a bad thing later in your investment lifecycle,
that when you're building up your portfolio,
cross security actually can be a valuable tool.
And the reason is, is when you are cross securing your properties at the same bank
you're often able to get a better banker, which has more more ability
to do what you need them to do outside the lines if required,
more competent banker and that's even through a mortgage advisor
they can find the right private bankers or business bankers to partner up with
and get those deals done, especially when income is tested in different ways.
And you can often save some costs around valuations.
You can sometimes get lower interest rates
and it just generally speaking as you're building up a portfolio
from, say, one property to three or four properties,
cross security, especially for a younger, relatively younger
investor, actually is something that's worth considering doing
when you're in your later stages of investing,
especially if income from non property related
things has dropped off then cross security can be a really bad thing.
So let me just show you about a scenario with cross security
so let's just say you've got three investment properties
with 800,000 each and you've got a $900,000 mortgage.
The portfolio is worth 2.4 million.
Now what you're after is you're after 500 K of cash
so that you can have a year or two of really comfortable living.
You just want the 500 K of cash.
So in your mind what you're thinking is, OK, 900 K mortgage across
three properties, then I've got 300 K
of debt across these three properties on each of them.
So you sell one of these properties to free up the 500.
But what happens is the banks says,
actually these properties are cross secured,
your income situation has changed
and we've tested
your ability to, to maintain this debt and we're actually going
to ask you to pay off not the 300, but you've sold this property.
We're going to ask you to pay off 800 K,
you're not going to get the 500 K and now
instead of having these three properties and the 900 K debt,
what you've got is two properties and only 100 K of a debt.
So you're not the benefit of leverage because your mortgage has gone from 900
to 100 and you're not getting the benefit of capital gains on three properties.
So it's a really terrible outcome through lack of planning.
And because you didn't understand
trust security before, during and after your plans
and you probably didn't get good advice and you did things in the wrong order.
Now in this scenario, if properties are cross secured
probably what you want to do right from the beginning of your intended
plan is to separate this property out and leave all of the debt across
the properties that stay with the bank, have this property freehold.
Then you can sell that property for 800 K cash
you've got
800 cash goes into your bank account
so you can deploy that 500 however you see fit.
And then if you want to, you can take the 300 K and,
and use it as an offset or you can use it for whatever else you want.
And so all of this stuff is relatively simple
for competent mortgage advisors
and really want to make sure that somebody understands your plans
before, during and after and you don't quickly execute property
sales or property transactions without understanding
the repercussions and without thinking a little bit further ahead.
So if you've got any questions about cross security, about the good
or the bad or the ugly, let us know in the comments.
Just be careful about being too black and white about cross security
because it gets a really bad name.
But sometimes it actually it can be a good thing.