The smart money diversifies not only its investments but also its lenders.

So why every week do I come across someone who has all their borrowings with one lender? Who is in control? Not you, the bank is as it will usually have tied up all your assets and so whatever you do in the future will probably require its input. Why do they do this? Simple they are all about making money not losing it.

The biggest mistake I see is an investor goes to sell a property with equity in it thinking the funds will be released to him or her at settlement. Not all the time. The bank may demand that the equity is kept by them to repay some of their debt. After all, they want to put themselves in a better position and why wouldn’t they, you probably would too right?

So why do people put all their loans with one lender? It is usually because they haven’t been educated in the risks or it is just easy or have been bought off by the bank. The line I hear all the time is my bank have given me $2,000/$3,000/$5,000 if I stay with them and lock in for 2-3 years and the rate is good. Well that’s fine, but why do they give you money, they aren’t a charity, there must be something in it for them?

So here’s what can happen. Here is an example of a real-life story, which has been doctored to protect the innocent.

An investor, Bob, who has multiple properties and his borrowings are 75% of the portfolio’s value. One day he decides that he is going to take his partner on a world cruise costing upwards of $50,000 and purchase a brand new car for $70,000.

As with most investors, he is asset rich cash flow poor, so he picks a property where he has good equity and lists it for sale. Two months later the property has been sold and the monies are due to come in. Then guess what his “friendly” bank says, “No you can’t have your profit/equity, we are keeping it to reduce our exposure to you.”

But it gets worse, not only has Bob sold his property and paid $30,000 in agent’s fees, he has also paid a deposit on the cruise and car. Not to disappoint his wife he then takes out a personal loan to pay for the cruise (because the bank won’t give him any more money), which he thinks he can pay off with rental cash flow.

Now you know as well as I do, that rentals aren’t rented out all the time and by the way, one of the properties has just been sold so I will leave you to work through in your mind how this could play out.

So what are the learnings?

Have a plan – how many properties are you going to buy i.e. what annual income are you shooting for?

Take advice at the start and get it right first time – Finance, loan structure, tax and legal.

Remember the saying “Expect the best, but plan for the worst”.