27 February 2015
What rental income percentage is taken into account when lenders work out lending potential?
When lenders work out your borrowing capacity for an investment property, they take into account rental income and your claimable expenses to see your capacity to repay the debt.
However, lenders do not take 100% of the gross rental income expected into account. While it varies from lender to lender, the general rule is that 80% of rent will be calculated into the equation.
Less common scenarios:-
– Some lenders are known to consider rental yields instead.
– Some banks, will allow you to live in the house with the intention of leasing out individual rooms, and may take this income into account.
– Some banks have been known to consider up to 100% of the rental income, however there are usually a number of other hoops to jump through to achieve this, such as an 80% or lower Loan to Value Ratio (LVR) and a maximum amount of total loans with that lender.
If you become “rent reliant” – where a certain portion of your income is made up by rent – then you may start to see yourself declined by some lenders.
Banks usually use rental income confirmed through a valuation. It can assist to provide a managing agent’s rent assessment on the property with your loan application.
1. Employ a property manager
Employing an expert property manager can save you a lot of headaches in the long run.
While it will cost a percentage of your rent, a specialist property manager can actually maximise your rental returns, simplify your responsibilities, organise all the paperwork, maintenance and inspections, find tenants and liaise with them and use their experience to minimise any potential problems.
2. Be aware of your legal responsibilities
All landlords should ensure they are familiar with their rights and responsibilities under Australian law.
The landlord tenant relationship is governed by the Residential Tenancy Act of each state and territory in Australia.
But common to all states and territories is the fact that landlords need to guarantee the safety of any rented property and its fixed appliances and contents, which extends to areas like maintenance and even health. Skimp on safety and you could find yourself in court.
3. Document and communicate
Ensure all tenant agreements are documented in writing as a lease agreement so all parties are on the same page. Good and efficient communication is key to a successful tenancy. If you have expectations about how the property should be kept, communicate them to your tenants or your property manager in advance.
4. Administer the bond correctly
It’s advisable to collect a bond up front against any future damage or loss of rent from prospective tenants.
The landlord cannot hold this bond themselves – it must be lodged with the appropriate state or territory residential tenancies bond authority who will hold the bond during throughout tenancy.
A bond can be held against any damage to the property, but cannot be held against “fair wear and tear”.
5. Look after your tenants
Attracting good tenants who treat your property as if it was their own is every landlord’s dream.
There are two key things you can do:
- Make sure your property is well presented and desirable
- Don’t skip on reference checks when assessing prospective tenants.And, once you have good tenants, do your best to keep them by ensuring the property is well maintained, being reasonable about any rent increases and making sure any queries are addressed promptly.
6. Consider landlord insurance
While a bond may cover small amounts of damage or loss of rent, landlord insurance covers other risks that can be associated with renting out a property and that don’t fall under a normal home and contents or strata title insurance policy.
7. Maximise your earnings
Rental properties are an investment so most landlords want to maximise their rental earnings.
You should keep an eye on market rents, choose a desirable area in which to invest and make sure your property is well maintained. But you should also seek expert advice about what you might be able to claim through the ATO – for instance, you may be able to claim back expenses like council rates, water bills or capital improvements against tax.
If you would like to discuss any of your property needs, whether it be renting/selling your property or buying a property in the Eastern Suburbs of Sydney (Bondi Beach, Bronte, Tamarama, Dover Heights, Double Bay, Rose Bay, Vaucluse, Queens Park, Bellevue Hill and surrounding suburbs), please feel free to contact me on
0413 807 344 or you can email me on email@example.com with your enquiry.
I look forward to hearing from you.
Raine and Horne Double Bay
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