When a deal involves financing a newly completed property for investment purposes a key element in a Lender’s assessment of the loan application is the anticipated gross weekly rent income. Typically the rent projection is determined by the valuer at the time that the mortgage valuation report is prepared. The valuers anticipated rent income should closely match the independent property management rent appraisals used by the buyer in establishing the case for purchasing the property for investment purposes. Generally speaking, the Lender discounts the anticipated rent income by as much as 25% when the loan serviceability is determined. While this factoring by the Lender provides reasonable assurance that overheads in operating the property are covered in the loan servicing calculation it does nothing to mitigate risk if the property is not rented.
Unless the property investment budget has been structured to absorb cash – that is, take hard earned cash out of the pocket of the investor there are a couple of things that I recommend my clients do to mitigate against having to kick in cash to cover rent shortfall or operating and maintenance expenses.
First up, before applying for the investment loan, I recommend that they add up how much will be required to pay annual body corporate and general operating costs and add to this at least two to three months anticipated interest only mortgage repayments. Then either reduce the deposit amount by this sum or increase borrowings to allow for this sum to be held available to cover the costs as and when due. This route may incur a Lenders Mortgage Insurance premium if the borrowings exceed 80% of the purchase price but this is a small amount to pay (or capitalise into the loan amount) to provide protection against a cash drain on other sources of income.
Secondly, I recommend not getting locked into a preconceived rental rate based on the one used when the purchase numbers were worked up. This is particularly true in the current Canberra market, were so many new developments are coming onto to the rental market at about the same time. Holding out to rent at the ‘budgeted’ rent rate could see the property sit unrented for a considerable period of time. Simple example: The ‘budgeted’ gross weekly rental is $420. The Property Manager receives an offer of $395 per week. This difference of $25 per week when divided into $420 means that for every week that the property is rented at the lower rate it will take almost 17 weeks at the higher rate just to catch up each week unrented.
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Peter Spooner is a qualified and highly experienced residential property financing specialist. He has access to over 800 loan products from a panel of 30 lenders (including all of the major banks) plus reach-back to over 500 Loan Market associates when formulating solutions for his clients. Peter does not charge a fee-for-service.