Loan Tip: Self Managing Investment Properties and Serviceability

If you are self managing your investment property, you might have some trouble in using the income for serviceability. This will result in a drop in your borrowing capacity.

Most lenders will be ok with including the income, for servicing, if you have a written lease and the rent is deposited into a bank account. However, if there is no written lease and if there are no deposits, or irregular deposits you might be in a spot of bother – the income won’t generally be able to be used for servicing.

This could be painful as you will likely still have a loan associated with the purchase of the property but no income to go against this extra expense.

A property rented for $600 per week could mean a drop in borrowing capacity of around $150,000.


Example

Homer rents out a property he owns to his mate Barney. Homer wants to save $50 pw by not using an agent and charges $600 pw to Barney to rent the place. Barney pays sporadically, mostly in cash, and Homer spends that cash.

Homer then goes and applies for a loan and tells the lender that he is receiving $600 pw in rent. They need proof to count this as income for servicing. Homer declares it all in his tax returns, but the last financial year only showed 2 months rent as the property was just purchased.

The lender tells Homer that without proof the rent cannot be used for servicing.

He should have a written lease and make regular deposits into one of his bank accounts – even if he deposits the cash himself.

 

It can be frustrating for a loan for any purpose. I have used a letter from my accountant as proof of rental income. If you are buying a new property a letter from a real estate agent can be used with a rental appraisal , the trouble is some have no idea of the idiosyncracies that enable a higher rent . The silly part is you need a lease agreement to get finance, sometimes you want finance to fund settlement but you cant lease a property until you own it. The silliest part is some insurance companies wont insure a house unless it is leased and the bank wont release finance until it is insured.

 

that wouldn't be accepted by some lenders

 

Even if the agent did understand that you were doing something to maximise rental income, if the valuer's rental appraisal figure (stated in the valuation report provided at the valuer's purchase inspection) is lower than the agent's, then that lower figure would be used in servicing anyway

 

Not quite.

Lenders will accept a property is intended to be let and will generally accept a local agent rent estimate for servicing. Nobody at that point cares for issues that enable higher rents. They want a guide to base servicing. Insurers also will insure untenanted property but they often have a unoccupied property time limit so leaving it vacant say 95 days may lead to lack of cover despite a policy. In at least one state merely signing a contract is grounds to get the property insured. All risk passes to the buyer if it is destroyed.

Some types of LL insurance may sometimes only be given when a lease has been made. Its a bit like travel insurance on a card - read the fine print to see its it actual cover.