Highlights from this week:

What will happen to Gold Coast property prices before and after the Games
Where to buy on the Coast NOW
Why these are not ‘boom’ times’
What is ahead based on what has already happened
Who is at risk from cross collaterisation
Getting the right property investment strategy for your situation

 
Transcripts:
We can't say the word but here is what it means - Andrew Mirams
Kevin:  It’s probably one of the hardest phrases to say and certainly one of the hardest terms to understand in property investing, and that is cross-collateralization. I have to be very careful when I say that. Andrew Mirams from Intuitive Finance joins me.
Andrew, I’ve always struggled with those words, but tell me about the meaning behind cross-collateralization.
Andrew:  I was going to ask, Kevin, firstly if you could start by saying it three times really quickly. It’s not the easiest thing to say, is it?
Kevin:  That’s not going to happen, I can tell you.
Andrew:  We might often call it cross-securities or something like that to break it down because not everyone understands what cross collateralization means. To understand what it is in the first place, your collateral is your property or the equity you have in your property.
Where a lot of lenders go with this is they will often link two or three or numerous properties to use that equity but it just intertwines all the properties into one big bundle. It’s a philosophy of ours that we don’t think that’s in the client’s or the investor’s best interests. We think that more favors the lender.
Kevin:  So what can the lender do if you are cross-collateralized like that? What are some of the dangers?
Andrew:  One of the key dangers I think is you really lose your flexibility. As soon as you have an all-in-one, and say you had a property in Melbourne that had gone up really strongly and you had one in Sydney that had gone up quite strongly but then you were exposed to the Perth market as well and it had gone down or you had a mining town or something like that, and so the Melbourne and Sydney have each gone up by $100,000 but the Perth and the mining town have each gone down by $100,000, your net equity is still zero.
Even though you have really good growth in a couple of your properties, those laggards are actually holding your portfolio back. By having them split out, you have a lot more flexibility where you could take advantage of those increases in equity. While the banks might be aware that you might be sitting on some negative equity or something or the other, they won’t force sale or anything like that as long as you’re meeting your normal commitments. So the loss of flexibility is one of the huge disadvantages to cross-collateralization.
The other thing is if you were to make a change to your portfolio – sell or want to refinance one out – that can often trigger then a revaluation on all your portfolio, and in the example I just gave, it might mean that any event or anything you’re trying to move forward with might actually end up with a nil outcome.
Having to re-trigger or get valuations done on all your properties, obviously the markets will move at different times and phases, so you don’t want to put your portfolio at risk there.
Kevin:  How do we go about avoiding that? Is it a matter of going to different lenders for different properties?
Andrew:  Look, you can certainly do it at one lender; you don’t necessarily have to go to different lenders. But that is one of the key things for those with larger portfolios and things like that. I think having numerous lenders on your side can be an obvious advantage to avoid that cross-collateralization, but you can avoid it even if you are still just that one lender. It’s just specifically having individual loans on individual properties.
Kevin:  It all depends, I guess, on how you look to the bank, isn’t it, and how you present yourself, Andrew?
Andrew:  Yes.