# Investment Property Rental Income



## Gundini (4 February 2010)

I would like to buy some positive geared investment properties.

After searching the net, I haven't been able to find any site that will give me a rundown of mortgage lenders that display the percentage of rental income they will take into account when borrowing for investment property.

When I first ventured into real estate the banks would take 80% of rental income when assessing your loan repayments.

I understand this has changed and is more variable.

Does anybody have a list of various institutions and the percentages they will consider, or prehaps direct me to a site that can be helpful?

Do lenders take a real estate agents written rental advise into account when assessing your viability for a loan? 

Thanks Gundini...


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## Tysonboss1 (4 February 2010)

Gundini said:


> I would like to buy some positive geared investment properties.
> 
> After searching the net, I haven't been able to find any site that will give me a rundown of mortgage lenders that display the percentage of rental income they will take into account when borrowing for investment property.
> 
> ...




80% of the weekly rent is a good figure to use, this allows for Rates, Maintainance, 1 week vacancy per year and property management fees. as well as a safty buffer.

I would use 80% for your calcs evern if lenders accept more


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## tech/a (4 February 2010)

Good advice *TB*.

*Gundini*
Have you thought of building (say a duplex/ multiple 3-6 better) keeping 1
or more using profits to positively gear those you keep?


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## Investor82 (4 February 2010)

80% is pretty standard and is also actually quite accurate!

A lot of banks will also 'add back' the tax advantage of the rental property so that you after tax income is accurately reflected.


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## adobee (4 February 2010)

my understanding was that they will calculate the annual net rental income and add this to your wage to get a total income which will then be calculated upon .. Yes real estate letters are taken to account from bank they actually request them, generally not from the selling agent ..

Postively geared property ?? Where do you propose to find this ? At present this would need to be around 10% return + on the purchase price ? are you taking tax bennefits into account when you work out your positive gearing ?


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## Tysonboss1 (4 February 2010)

adobee said:


> Postively geared property ?? Where do you propose to find this ? At present this would need to be around 10% return + on the purchase price ? are you taking tax bennefits into account when you work out your positive gearing ?




All property starts off positively geared it's only the over leveraging that makes it negative.

As tech/a was hinting generally you have to be quite an active property investor to create positive cash flow out comes using leverage, other wise you end up with dodgy property in a dying rural town.

At the end of the day, residential property in the capital cities or main regional centres provides one of the safest steadiest income streams you can hope for, and anything that is that safe and easy will never trade on low p/e ratios, 

Generally property trades on P/e's of 25, and like any other investment trading on p/e's of 25, you can't really expect to get a "passive" positive cashflow off the shelf on 100% leverage.

Not at the moment any way.


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## Julia (4 February 2010)

I haven't had any IP's for many years.  Back when I did, inflation was very high (in NZ) as were interest rates (22% on IP mortgage), but rents and capital appreciation were amazing.

I'm considering IP again at present, though not sure if I want the bother of tenants, body corporate arguments etc.

Would be paying cash.   

There seems to be a wide divergence of views about capital growth in the next few years.  Without this being fairly reasonable, my rough calculations on the return after expenses suggest only about 4% which hardly seems worth the trouble.

Is there something else I should be taking into consideration?


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## jbocker (5 February 2010)

Julia said:


> I haven't had any IP's for many years.  Back when I did, inflation was very high (in NZ) as were interest rates (22% on IP mortgage), but rents and capital appreciation were amazing.
> 
> I'm considering IP again at present, though not sure if I want the bother of tenants, body corporate arguments etc.
> 
> ...




There is a lot to take into consideration Julia, age of the property being one of them. If it is a newly built property there is depreciation of the asset including contents that can be a considerable sum against tax. Get a proper depreciation schedule from a quantity surveyor done on any purchase. You may have considered depreciation figures in your calcs, a good accountant could best advise on that and other considerations. As a cash buyer you would be in a great bargaining position, and the best capital growth is often done in the purchasing. 4% does sound about right in general terms but I daresay there would be opportunities to do much better. Take your time.


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## GumbyLearner (5 February 2010)

jbocker said:


> There is a lot to take into consideration Julia, age of the property being one of them. If it is a newly built property there is depreciation of the asset including contents that can be a considerable sum against tax. Get a proper depreciation schedule from a quantity surveyor done on any purchase. You may have considered depreciation figures in your calcs, a good accountant could best advise on that and other considerations. As a cash buyer you would be in a great bargaining position, and the best capital growth is often done in the purchasing. 4% does sound about right in general terms but I daresay there would be opportunities to do much better. Take your time.




Great advice


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## DocK (5 February 2010)

I've often wondered about the benefits of commercial property investment, rather than domestic.  My smsf will have enough to purchase a small factory/duplex in the next year or so, and I'm more inclined to purchase the factory than the duplex.  Possibly as we've done quite well with the factory it presently owns (rented by our own business), which has appreciated very well over the past several years, and has excellent tenants.  Also as it is easier to evict a non-paying business than a 90 year old granny who gets on Current Affair or Today Tonight etc, and there's only so much damage that can be done to a concrete slab with tilt slab walls, compared to the cost of refitting a totally wrecked home.  Obviously you'd need to compare rental return rates and growth rates in the prospective area, and there seems to be a fairly popular view that there may be a bubble about to burst in the near future?


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## bellenuit (5 February 2010)

Julia said:


> I'm considering IP again at present, though not sure if I want the bother of tenants, body corporate arguments etc.




Julia. By this do you mean you are looking at commercial property or do you mean residential property that you would leave untenanted?


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## Taltan (5 February 2010)

If anyone knows where to find positively geared IP at the moment I would love to know where. 

Julia 3-4% sounds about right, don't forget the massive stamp duty costs and the tax upon sale. King Henry in Canberra has already flagged you mmight not get a generous discount upon sale. As previously said remember you are buying a safe investment you cannot expect spectacular returns. 

The Westpac 5 year TD rate of 8% might sounds better but it is not inflation proof like the IP. Stocks should return better but are riskier.


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## tech/a (5 February 2010)

> If anyone knows where to find positively geared IP at the moment I would love to know where.




Put enough down and any property will become positively geared.
Difficult times require more equity.
Ive been selling and placing profit into equity in others for sometime gearing was 83% now 38% and aiming for 14%.
Holding costs on developements not included. 

Commercial property.
Great topic and deserves a thread of its own.
Did my Kahuna's on commercial/industrial back in the late 80s


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## Bushman (5 February 2010)

For all those considering commercial, remember it is capital intensive if you wish your property to remain competitive. So don't just buy on yield alone; do a 10-year DCF and make sure you get a comfortable risk/reward trade-off. 

Industrial is usually great re yield but always presents a quandary for an exit strategy. But if it is a future ressie land bank paying good yield to tenants that will not go bust and with solid lease covenants, it can be a real kicker.


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## Tysonboss1 (5 February 2010)

Re- Commercial property,

It can be a great investment, But not for the under captialized begineer.

You don't want to be sitting on a $800,000 loan, When you tenant goes bust or out grows the building. 

It can often take up 6months to find a new tenant in good times and 18months in bad times, and you have to fund any loan yourself in that period. 

Not to mention that the new business tenant may haggle you down on the new lease and destroy the yeild you used to get, while also asking for first months rent free and building changes etc, and what are you going to do, you need them so offcourse you agree.

I would only recommend commercial to well capitalized investors as part of a diverse portfolio with strong income streams from other areas to support it is things go pear shaped for a while.


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## Bushman (5 February 2010)

Tysonboss1 said:


> Not to mention that the new business tenant may haggle you down on the new lease and destroy the yeild you used to get, while also asking for first months rent free and building changes etc, and what are you going to do, you need them so offcourse you agree.




Spot on. For example, average up-fron incentives across office markets is now between 25-30% in markets that are suffering lower demand. In many cases, landlords are also paying for fit-outs. It is still carnage out there in lease land and tenants currently have landlords by the throat. That will kill you if you don't have deep pockets. 

So a DCF with realistic assumptions (all cash - incentives, capex, rent frees, fitouts, agents fees, up-front costs, selling costs) needs to be used to double check your simple cap. rate type valuation.


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## DocK (5 February 2010)

Excellent points to consider and great info, thanks guys.  To be honest, we'd only be looking at buying a single bare bones factory for 200 - 250K through our smsf, with no debt.  I'm sure office/retail showroom etc is a different kettle of fish altogether, and once you have that monthy interest cost to contend with I can certainly see the need for deep pockets.  I'm on the Gold Coast, so perhaps vacancies don't last quite as long in the types of factory I'd be looking at as in some other areas, but having said that there are certainly quite a few new buildings popping up all over the Gold Coast - Brisvegas corridor - and quite a few appear empty atm.  I won't be seriously thinking about it for a year or so, so maybe by then there'll be some bargains to be had from desperate sellers:

Apologies to op for the thread hijack


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## Tysonboss1 (5 February 2010)

DocK said:


> Excellent points to consider and great info, thanks guys.  To be honest, we'd only be looking at buying a single bare bones factory for 200 - 250K through our smsf, with no debt.  I'm sure office/retail showroom etc is a different kettle of fish altogether, and once you have that monthy interest cost to contend with I can certainly see the need for deep pockets.  I'm on the Gold Coast, so perhaps vacancies don't last quite as long in the types of factory I'd be looking at as in some other areas, but having said that there are certainly quite a few new buildings popping up all over the Gold Coast - Brisvegas corridor - and quite a few appear empty atm.  I won't be seriously thinking about it for a year or so, so maybe by then there'll be some bargains to be had from desperate sellers:
> 
> Apologies to op for the thread hijack




Don't let me turn you off the idea of commericial, it can be and is a fantastic investment in alot of cases. you just have to know what your getting into.

there are alot of factors you have to think about, but if you can take a step back and look at the big picture and feel comfortable, by all means jump in, 

some things I would like about are,

vacancy periods - how long would it honestly take to find a new tenant.

future supply- is there any new modern alternative that may be more attractive to tenants coming on line.

Uses - how many different types of business could use this space, we have all seen the old vacant pizza hut buildings, ex service stations and CBA banks. make sure your space can be used for multiple purposes.

Transport and traffic - does it have easy access to freeways, does it have parking, can trucks easily make deliveries / pick ups, does the building have street appeal to passing traffic. 

Quality of tenant - is the current tenant an energetic go getter who cares about his business, or a lazy slob sitting on a sinking business. the land lord should think of himself as a business partner, and if you wouldn't normally go into partnership with a business person you shouldn't rent them space.

Customer areas - even a simple mechanic workshop benefits from a clean, air conned office space where customer make their transactions away from the greece and grime of the workshop, I business never seems as professial when all a can smell is the work shop as i sit sweating in a dirty waiting room.


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## Julia (5 February 2010)

jbocker said:


> There is a lot to take into consideration Julia, age of the property being one of them. If it is a newly built property there is depreciation of the asset including contents that can be a considerable sum against tax. Get a proper depreciation schedule from a quantity surveyor done on any purchase. You may have considered depreciation figures in your calcs, a good accountant could best advise on that and other considerations. As a cash buyer you would be in a great bargaining position, and the best capital growth is often done in the purchasing. 4% does sound about right in general terms but I daresay there would be opportunities to do much better. Take your time.



Many thanks, jb, especially for the reminder about the depreciation.



bellenuit said:


> Julia. By this do you mean you are looking at commercial property or do you mean residential property that you would leave untenanted?



No to both, bellenuit.  Would be looking at residential property and I couldn't afford not to have it tenanted.  My remark about the potential tenant hassle was just an acknowledgement that this can always be a problem, though in the past I had great tenants.



Taltan said:


> If anyone knows where to find positively geared IP at the moment I would love to know where.
> 
> Julia 3-4% sounds about right, don't forget the massive stamp duty costs and the tax upon sale. King Henry in Canberra has already flagged you mmight not get a generous discount upon sale. As previously said remember you are buying a safe investment you cannot expect spectacular returns.
> 
> The Westpac 5 year TD rate of 8% might sounds better but it is not inflation proof like the IP. Stocks should return better but are riskier.



Yep, thanks Taltan.  The notion of buying property is only attractive on the basis of the potential capital gain which is in contrast to the diminishing value of funds in the bank.


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## James_w (13 February 2010)

quite a few rental propeties around in qld with 10%+ returns and long term leases to mining companies for 2yrs etc


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