Proving serviceability?

[DexV2]

Hi guys, I'm a total finance noob so could anyone clarify?

How does one eventually prove loan serviceability to the banks once you decide to go into property full time? What I mean is that while employed it's quite easy to prove that to the banks, but once you quit (assuming you have a sizable portfolio), how would you then show proof?

Is this where +ve cashflow from passive incomes comes in? Or you put up your existing IP as collateral?

What's the missing link?
Cheers!

 

[Peter_Tersteeg]

If you're really positive cash flow, your rental income might be enough to demonstrate serviceability for more lending.

There are some (very advanced) strategies you can employ using annuities which may help in these circumstances.

Otherwise, if you can't demonstrate that you can afford the loan, lenders won't give you the money. The simple reality is that when people get close to retirement age, it gets very difficult for them to borrow money.

 

[Terry_w]

What's the missing link?
Cheers!

Income. Without a good income of some sort collateral is irelevant.

 

[Rolf Latham]

Full time property investors - I have a few on the books.

If the portfolio is really self sufficient and throws off plenty of taxable income, OR is soaked up by depreiation, 2 years tax rtns is generally enough to get around many lenders.

If the Lvrs are over 70 to 80 % for resi and LMI is involved, its very very hard.

I guess an important thing is, what full time means.

for some thats 20 k a year, for others its 200 +


ta
rolf

 

[Jamie M]

It's very hard to prove serviceability on rental income alone.

Even if he the portfolio is generating decent cash flow - most lenders will still only take 80% of gross rent into account and will also assign a minimum monthly living cost which is based on the number of adults/kids in the household.

If LMI is involved then some lenders will feel uncomfortable with the scenario and may deem you as being too rent reliant (which is a bit silly because it's arguably a more secure income then a payg role if you're generating rent across a number of properties).

If you're flipping properties and making decent profits then you'd be considered self employed and would usually require two years of company financials.

Cheers

Jamie

 

[Shahin_Afarin]

So is the issue that your are self employed, get cash in hand or don't work at all?

Properties would need to be heavily cash-flow positive for the income to actually assist in servicing.

 

[D.T.]

So is the issue that your are self employed, get cash in hand or don't work at all?

Properties would need to be heavily cash-flow positive for the income to actually assist in servicing.

I imagine after a few years of rent rises with debts remaining the same that this might be possible?

 

[Shahin_Afarin]

I imagine after a few years of rent rises with debts remaining the same that this might be possible?

Yeah for sure but I doubt the average investor wouldn't pull some money here and there and increase debt.

Also that cost of living is going to increase so this would affect servicing moving forward.

 

[DexV2]

Thanks everyone!

So with a lowish LVR (<50%) or even no loan at all could potentially prove serviceability? Would just need to show roughly 2 years of tax returns?

 

[Peter_Tersteeg]

Thanks everyone!

So with a lowish LVR (<50%) or even no loan at all could potentially prove serviceability? Would just need to show roughly 2 years of tax returns?

You can use rent to prove serviceability. The problem is the numbers usually don't stack up well enough to provide enough serviceability.

It's not possible to say what LVR you need to get to, because we don't know what future interest rates, rents, or purchase prices will be.

It's far to say that the less debt and more income (rent or otherwise) you have, the more you can borrow.

 

[tobe]

A rule of thumb Jan Somers uses in some of her books is 5 unencumbered regular family homes. If the rent is roughly 25% of an average wage, and 20% (the fifth property) is used for costs such as repairs rates etc, then this is enough to replace an average wage.

So theres the trick, 5 paid off rentals will replace an average wage. The potential rent on the next purchase should get you over the line to borrow for the next one.....

 

[D.T.]

A rule of thumb Jan Somers uses in some of her books is 5 unencumbered regular family homes. If the rent is roughly 25% of an average wage, and 20% (the fifth property) is used for costs such as repairs rates etc, then this is enough to replace an average wage.

So theres the trick, 5 paid off rentals will replace an average wage. The potential rent on the next purchase should get you over the line to borrow for the next one.....

In terms of a comfortable living sure. In terms of successfully taking out loans, not so sure?

 

[tobe]

yup, thats why its called a rule of thumb.

If you had 4 unencumbered investment properties there may be enough income to cover living expenses and a new mortgage, just depends on what the actual figures are.