The Personal Balance Sheet
Establishing that I could positively gear my apartment was a crucial step. Had I not been satisfied my property would make a good investment, the alternative would have been to sell the apartment and purchase another more suitable investment property.
My next step was to prepare a personal balance sheet. As the name suggests, it was a simple table showing my personal assets and liabilities, as well as my monthly income and expenses. Primarily, I put this information together because I knew the bank would require it before considering any loan application. The table I used was simple in style and content, but comprehensive in its list of inclusions.
Because I was not starting my new venture from a position of substantial financial strength, I wanted to make this document appear as impressive and comprehensive as possible. The reason for making each section of my financial report as informative as possible was to anticipate every personal and financial detail that the lending institution might reasonably require when determining my eligibility for a loan.
More importantly, by including this information up-front I wanted the lender to accept my financial report, with all its inclusions and conclusions, as true and correct.
To make my personal balance sheet appear more impressive, I included such items as superannuation, even though I had no intention of using these funds to help me build a property portfolio.
I also included a figure for household furniture and my car. Some insurance companies offer agreed value policies for things like furniture and cars, that allow you to determine (within reason) their replacement value if they are stolen or damaged. The extra cost of such a policy is often minimal. For readers like me, who are starting with a relatively small asset base, I recommend increasing the level of your car and furniture insurance. In my case, the cost was nominal, so I increased my cover to a much higher value.
Because banks and the like do not inspect cars and furnishings, they will generally accept your stated value. If your stated value is the same as the insured value, it adds credibility to your personal balance sheet.
Because lenders anticipate that borrowers will inflate the value of their car(s) and furnishings, they will often only take these items into consideration at a much lower figure than you have indicated. They may even dismiss these items entirely when assessing a loan application. Despite this, I recommend that you include as much as possible in the asset column of your personal balance sheet. While initially, your loan application may be assessed by a computer, ultimately you are writing for a person who can start you on the road to owning your first investment property.
Many people with a steady income do not have a large amount of money saved and may not have a share portfolio. If you do not have a history of saving or servicing a loan, personal items such as cars and furnishings may be taken into consideration. These could make the difference between securing an investment loan or not. Without furnishings you will appear to be a spendthrift, and the loan assessor will be hesitant to approve your loan.
I also included a monthly salary and rental figures. As mentioned earlier, I had a letter from an employer stating that I was working as a contractor. Included in that letter was a projected income figure over a twelve-month period. To calculate my monthly salary, I simply divided this figure by twelve.
| Personal Balance Sheet | |||
| Assets | Liabilities | ||
| Investment Property | $245,000 | Home Loan | $192,000 |
| Car | $30,000 | ||
| Home Furnishings | $40,000 | Visa Card | $5,000 |
| Superannuation | $55,000 | ||
| Savings Account | $3,000 | ||
| Total | $375,000 | Total | $197,000 |
| Incoming/Month | Outgoing/Monthly | ||
| Salary | $3,200 | Home Loan Repayments | $1,062 |
| Rental | $1,581 | Visa Card | $1,500 |
| Total | $4,781 | Total | $2,562 |
To determine rent, I took the average of the three rental estimates I had obtained. I included a projected rental figure, even though my property was not being rented, because I wanted to show that the anticipated monthly rental exceeded my monthly loan repayments. With the projected rent, the total incoming easily exceeded my outgoing figure. Naturally, if the property were let, I would include the actual rental figure.
Summary
- Create a personal balance sheet to demonstrate your eligibility for a loan
- Include all your assets on the balance sheet, including things like home furnishings, your car, and superannuation
- Also include your liabilities, and your monthly incomings and outgoings
- Consider taking out insurance to protect your assets and so you can use your insurance statement to demonstrate their value
- If you have a rental property that’s not currently let, use an estimate of projected rental income in your list of monthly incomings.
