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How do banks treat Dual Occupancy high yields?

Discussion in 'Property Finance' started by Andrew H, 21st Apr, 2016.

  1. Andrew H

    Andrew H Well-Known Member

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    I'm currently turning a property into dual occupancy. With this comes an increase in rates and due to the location insurance is high (north qld). I'm expecting a >10% gross yield based on PM market appraisals. But property is only slightly positive cashflow due to the above. My question is would banks even know about the increase in rates and insurance when looking at the income it is producing. I.e does their lending calculators take this into account? Maybe when/if i present 2 leases for the one property it triggers something?
     
  2. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    Some lenders restrict max useable to 6other 8 % and some dont care

    banks typically wont assess the increased costs

    ta
    rolf
     
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  3. Andrew H

    Andrew H Well-Known Member

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    Thanks @Rolf Latham was hoping some wont take it into account
     
  4. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    Not much you can do about the restrictions Rolf has indicated above when you're purchasing, although lenders have been known to make exceptions to this rule when given adequate explanation.

    When you're looking for additional finance down the track and the dual occ isn't the security property, you can simply increase the value of the property on the asset and liability statement so it looks as if it's lower than 6% yield. Lenders generally don't do valuations (not even desktops) of properties not being used as security.
     
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  5. Andrew H

    Andrew H Well-Known Member

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    I was thinking more along the lines of having a large yield on these properties increasing my serviceabilty, would it being 10-11% gross not net?
     
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  6. euro73

    euro73 Well-Known Member Business Member

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    10%+ will start to aid your borrowing capacity a little bit, with some lenders.

    Those lenders that take 80% of rent would consider a 10% yield to equate to 8% as income for servicing.

    Against a 7.4% or 7.5% assessment rate, you'd be adding a little to your capacity
     
  7. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    Doesn't matter what you actually get, some lenders simply knock it down to 6% or 7%. There's your cash flow position, then there's the banks risk management of your cash flow position. Completely different things but it's the later that determines how much the bank will lend to you.

    Like I mentioned, there's ways to get around it, you just have to be aware of what the banks policies are upfront so you can manoeuvre around them.



    As Euro suggests, it'll take at least a 10% yield to increase your serviceability. Keep in mind that whilst 6% is still a reduction in serviceability for the bank, it's still a better position than a 4% yield.
     
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  8. Andrew H

    Andrew H Well-Known Member

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    Great thanks for clearing that up
     
  9. Elives

    Elives Well-Known Member

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    with this duel occupancy property wouldn't the banks only take the 10% after 2 years of tax returns as it's quite high? etc i thought share houses of 8-15 people these kinds of deals have to have 2 years tax returns before banks will count the extra income?
     
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  10. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    The banks won't look at tax returns for existing property, but just go on the rental statement. A boarding house is a commercial venture and must different.
     
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  11. Elives

    Elives Well-Known Member

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    whats the benefit of increasing the value to lower the yield? :S
     
  12. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    Already explained in my original post.

    If certain lenders see a yield of higher than 6%, they ignore the rental income above what they calculate as 6%. My increasing the value (as disclosed in the application), the yield is calculated to be below 6% and thus they use all of it.

    Essentially they think a high yield is too good to be true and adjust it downwards. To counter this you adjust the disclosed value upwards to artificially adjust the yield to something they'll believe.

    Another reason you might do this is to improve your credit score. If your whole portfolio is leveraged to 90% lenders might decide you're high risk and deny finance based on that alone. If you adjust the figures to look like 80% or lower, they might assume you're lower risk. In some cases this can be a deciding factor in success or failure of a loan application.

    You can't do this for the security property as they get a valuation on that property. You can usually get away with it for other properties in the portfolio however.
     
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  13. Melbpositivegeared

    Melbpositivegeared Well-Known Member

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    IF the banks are writing down the additional income from the second half (I don't know if they do this?) one solution could be a head lease.
     
  14. Melbpositivegeared

    Melbpositivegeared Well-Known Member

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    This is really interesting....
     
  15. Elives

    Elives Well-Known Member

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    question say i have a property i purchased for 265k market rent is 280 p/w but i rent out each room so it's actually 430 p/w which is (8.44% yield) for me to increase the value to get it to a 6% yield it would have to be 370k.

    would this be legal? as the increase is so massive. 265k to 370k after 3 months of owning it?
     
  16. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Banks ask for the estimated value for the properties you own but are not giving them a mortgage over. Client estimates are generally higher than reality. It would be unlikely if anything come of this but if, in the unlikely event, you would be charged with 'obtaining a financial advantage by deception' keep in mind how you would justify your figure.
     
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  17. Corey Batt

    Corey Batt Finance Strategist Business Plus Member

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    For the most part it's just about keeping in line with a realistic estimate of the property value. Occasionally I do see this across some portfolios - where clients list their values at purchase price/nominal increases- which may be upwards of 30-40% below the upper range estimate of value. If this isn't picked up and the yield is beyond the lenders capped %, then it can reduce the borrowing capacity more than necessary.

    Never falsely disclose figures to try manipulate results - as this is a crime.
     
  18. Elives

    Elives Well-Known Member

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    Whats a head lease?
     
  19. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    The rule was created to address abnormally high rental yields in mining locations where the rental yields were clearly not sustainable. $280/wk is an affordable rental expectation for many locations where the price point might be only $265k.

    Wait until a lender tells you that you've got too many properties and are to 'rent reliant' for them to be willing lend you any more money. I can actually give you the risk version of why this is a valid concept, but anyone with numerous properties will tell you it's utter bulls&!t in practice.

    The banks could easily verify stated property values via a quick and cheap RP Data report (they can even automate the process) and they know about this loophole. That they choose not to verify except in obviously extreme cases also says something. There needs to be a 'reasonable test' applied to this.