Buying +geared property for servicability??

[rugrat]

Ok, feel free to tell me i'm an idiot if need be

I am curious if buying a +geared property (say around 13% gross yeild) would help 'improve' my servicability?

There have been a couple of properties I have seen that are relatively 'cheap' (cheaper then the ones I am looking at in canberra), which have a great rental yield (around 12-13% gross), but which don't have very good capital gains prospects. So if I were to buy these it would be purely for the rent, but I was thinking it may have the added benefit of increasing my servicability because it would increase my overall income? Or am I way off base?

 

[Perth Investor]

No idiots around here Rugrat. This is pretty much what it will do. The banks take 75-80% of your rental income and add that to your total income, and most take your repayments at an interest rate of 7.5-8%. So at 12% yield, you would have a property that the banks view has an income of 9.6% and they would work out the interest cost as say 8%, so you would be increasing your servicing potential by that difference of roughly 1.5%.

This can be helpful if you have some equity, but tight servicing.

Noel

 

[Rolf Latham]

As a very general snapshot Most lenders will assess at the mid 7s, PI over 25, taking 75 % of rental, so 13 % is positivish.

Then sometimes the buggers have the audacity to tell you .....too reliant on the rent to service the loan pls go away.

Thats the same logic brigade that says, sir, you can not afford this loan IO, so to manage your risk you can have it on PI I know many of you dont believe, but its true..........

ta
rolf

 

[Minxdamanx]

Then sometimes the buggers have the audacity to tell you .....too reliant on the rent to service the loan pls go away.

rolf

Ridiculous - it would be as stupid to say that a borrower is too reliant on their income to service the loan.

Crazy stuff

 

[Aaron Sice]

maybe it's time for a national lending standard and criteria.....

break out the fascists.

 

[Rolf Latham]

Hiya Minx

gets funny when you have a borrower with 25 Ips and One job

As a hard core scientist by backgorund I find some of the things in the financial and corporate world totally fuzzy

ta
rolf

 

[Thrawn]

you can not afford this loan IO, so to manage your risk you can have it on PI I know many of you dont believe, but its true..........

I'm sure you know this Rolf..

IO servicability calculation by the bank is not based on just the interest component. Its based on the P&I component on the remaining non-IO period of the load (usually 25 years on a 5 year I/O). This means that the IO loan will have higher servicability requirements (to the bank) than an equivalent length P&I.

Also, from the banks point of view, to reduce their risk.. they want you to pay as much of the principal as down as soon as possible. Say you lose your job after 2 years.. if you've been paying P&I, the bank will have a little bit of extra principal in the LVR margin. If you've been paying IO, they probably won't cut you any slack at all with the repayments as you'd be higher risk.

 

[Minxdamanx]

Hiya Minx

gets funny when you have a borrower with 25 Ips and One job

As a hard core scientist by backgorund I find some of the things in the financial and corporate world totally fuzzy

ta
rolf

Yes I get you. Mind you the whole loan/RE business has no logic as such. Perception, gut feeling, desire, different serviceability modules between lenders, emotions, vague 'criteria', valuations that can vary wildly (should that be widely?) - not a lot of logic or science or hard-cold facts in this whole thing if you think about it like that.

One lender says yay, another nay - same figures

 

[Minxdamanx]

maybe it's time for a national lending standard and criteria.....

break out the fascists.

I wonder how many of us would qualify? Surely if you made a 'standard' wouldn't it be by definition, conservative?

On the plus side nothing would ever be subject to finance - you would know beforehand. In fact what would be the competitive edge to the banks? Wouldn't they have to understand and indeed give 'service' to keep market share? Now there's a thought

 

[Rolf Latham]

Also, from the banks point of view, to reduce their risk.. \.

Nooooo, surely not that they have always asked me to sell that logic on protecting the clients interest.

Ulimately some of the weasel words they get away with some of the time are just plain wrong, and within a whisker of deceptive conduct. Fortunately these are minor occurences

ta
rolf

 

[gg1965]

Ok, feel free to tell me i'm an idiot if need be

I am curious if buying a +geared property (say around 13% gross yeild) would help 'improve' my servicability?

There have been a couple of properties I have seen that are relatively 'cheap' (cheaper then the ones I am looking at in canberra), which have a great rental yield (around 12-13% gross), but which don't have very good capital gains prospects. So if I were to buy these it would be purely for the rent, but I was thinking it may have the added benefit of increasing my servicability because it would increase my overall income? Or am I way off base?

Hi rugrat,

This is basically what i do. My situation is a single income family with one child (although my income is much higher compared to average) but to increase my income, i target positive geared places. It also helps that i buy run-down places and do them up in order to increase the rental potential (but that is another story).

I buy for the rental income - not for capital gains. Any gains i get is a bonus but the positive rental income is what i look for. As you may already know, i also focus on regional nsw.

Bottomline, i look at run-down places and i prefer the forgotten federation or older style places in regional nsw. buy them, do them up and increase the rental potential with the view of having all positive geared places.

This methodology may not rock everyone's boat but it suits me, my situation and my interests.

BTW does this mean that you are now looking outside of Canberra?


thanks


g

 

[devo76]

IP 1 costs me $5000 per year
IP 2 makes me $3,500 per year

IP 3 should make me $1,500 per year after tax.

Net cashflow $0 for 3 properties. This allows me to look for more positive or negative properties. My servicability would allow many negative geared properties but im always cautious of the what ifs. My current stratagy means a job loss,change of lifstyle,kids or sickness would not force me to sell.

All good.

 

[rugrat]

HMMMmmmm....

You have all given me something to think about. Basically, DH and I have been putting off looking at anything until we settle on this IP (which has yet to even be close to start to being built as it keeps on being pushed back), which we are unable to lock finance in for until settlement due to the huge (and ever expanding) gap between when we signed and completion. So we have been playing it safe, to ensure our servicability will still be sufficent (I would prefer not to have to go back to work, if it can be avoided).

But because settlement is continually being pushed back (not bad from a capital gains perspective) I am getting antsy, and keep noticing all the other oppertunities that pass by whilst I am waiting.

what Rolf has said regarding the banks attitude has crossed my mind though, and that is probably the number one reason holding me back so far - I don't want anything to compromise the IP here in canberra.

gg1965 - In answer to your question, I have always been keeping an eye on regional nsw, specifically the northern tablelands, as I know the area well and can see some potentially good investments there. My only real concern being the distance from here to there, but I have good friends in the area with good local rental housing knowledge to help out there. We very nearly bought some units up there at the begining of the year, but got outbid by another investor.