Serviceability question regarding income from remote properties...

Would you serviceability income markedly if you could (lets just say theoretically) purchase a remote/rural property with multiple dilapidated houses on it, renovate them, and then successfully rent them out?

Lets say (theoretically) purchase price of $150,000
Rental income after extensive renovations (mostly done by my fiance and his brother): $800-$1,000 p/w

It might sound abit unbelievable the return but it is a huge amount of work to get them to that stage where they could be rented out. But anyways, please answer the question as if the return was possible even if you disagree with my numbers.

I'm thinking it should in theory help with serviceability but perhaps because the income (or properties producing the income) are in a remote (not even Category 3) location, that the banks might only want to accept, say 50% of the income as true, rather than the 80% or so they'd normally accept in a metro area. If that's the case does anyone know the % generally accepted by lenders?

 

I've never had a lender refuse to use rental income due to property location, however many will cap the yield to 6% which isn't helpful in your scenario.

 

Out of curiosity:
Would it help if the properties were brought in a trust/company structure and trust pays regular income at say 10+% of trust's assets?

 

Thanks for the prompty reply Jess

In that case only helpful to the extent to which I could get the properties valuation lifted I would suppose?

 

Yes, if it was a trust controlled by someone other than you!

 

Just been told by CBA that they won't accept rental income from a remote WA postcode :-(

Cheers

Jamie

 

How remote are we talking? This one isn't even really remote in my opinion but it's not a Category 3 so it's remote as far as lenders are concerned. Is that something you've experienced before Jamie?

 

Probably wise in some ways.

 

Yes - and lenders don't do vals on properties they're not refinancing /purchasing so as long as you use a different lender you can say the property is worth whatever you think. After those renos I imagine there'd be a significant uplift in value anyways.

 

Lol ok so I think it's worth about a mill now and 6% of that is $60k so my $1k a week income is now added into my income for serviceability?

 

Well if it's gotta be in the ballpark of what others in the area go for it's not as straight forward as a place like Woodridge where valuations are a little more obvious. In this region properties are traded infrequently, the land size varies significantly and there is no real comparable as there are no others with multiple dwellings on them in the location.

I guess that means a full valuation but how would they go about valuing it and would they consider the rental income it's producing in forming their valuation in a case like this?

Just basically looking for the loophole (if there is one) in this case

I've seen that a property with one quarter of the land size of this one not even fully renovated to the extent that we plan sold for almost a quarter of a mill recently. So basically if I subdivided it all up (cut it into 4 pieces each with a renovated house) it's a possibility but I don't know if it's way too expensive to subdivide an acreage or whatnot never looked into it. I doubt they'd accept my logic of 'well it's worth 4 x 'this one that sold that is on a quarter of the size block' unless it was subdivided up all properly

 

Ha no - you will need to evidence the rental income.

 

Are you using the property for security?

Is the property a location that they have advised in unacceptable security?

Was there anything else tricky with the deal?

 

Yes I was talking in the context that they were actually rented out for that amount or close to it. I have no doubt they'll get the rental income I state, but I don't think the valuation would come close to $1M without subdivision - perhaps half that or maybe not even that.

 

Hey mate

Yep - property for security.

Didn't advise location was a no go.

A little tricky - certainly not vanilla.

 

Lenders are not stupid, but sometimes they can be....

Your not going to get a large income to get a green light on some place that will take years to sell if the lender takes over.

Even in good towns, they can be hard to convince, and the lower the lender, the harder it can be to convince.

So, you need a pretty solid proposal, otherwise, it will sink.

I have no dog in this fight

 

Ok thanks for all the tips above. Does anyone know the cost (or rough estimate) of a very straightforward subdivision?

In short all amenities are already connected to all houses so there's not really any physical work that needs to be done besides a fence to separate the properties. Is it simple and cheap in that case or still a P.I.T.A? Don't imagine there would be any objection from neighbors really as there hardly is any houses nearby and certainly none that would be affected.

 

You can ask a surveyor for an estimate of costs, but you need to know what the council will allow first, for instance, you may need 100 or 500 acre etc to be able to subdivide in some areas, or you may be able to do small lots but council will not allow building of homes on the resulting lots.

So, you see, it varies and is not so simple.

 

Usually for plays like this (really high yielding investments) - there's a catch in terms of impact on borrowing capacity.

I.e. banks include a smaller fraction of rental income, treat it like a biz and want longer histories & net figures (tax returns), limit it to 6%, or exclude it altogether. Best case scenario will be a segment of the lending market will include it, while plenty will not.

In terms of creative methods to maintain/extend borrowing power - rarely do the significantly higher yielding properties work out to be the best solution. Other similar strategies include serviced apartments, tiny units, student accommodation, etc. These usually have limited capital upside though, and risk that lenders won't include the income.