Purchasing a positive cashflow property in Australia can be a strategic way to build long-term wealth, but the type of property and ownership structure can significantly impact the financing options available. Understanding how different property types are financed is integral in allowing you to compare each property type as each finance option can require different deposit amounts and interest rates which will ultimately affect your return on investment and cashflow.
Rooming houses are properties where multiple tenants rent rooms individually, often in shared accommodation setups. Due to their unconventional structure and tenant arrangement, lenders may treat rooming houses as commercial properties. This will largely depend in the design of the rooming house. Conventional designs with up to 5 ensuited bedrooms and a standard family home layout may qualify for residential finance however a long term rental assessment will be used for your serviceability. Rooming houses with self contained kitchens and living rooms or larger 6-9 bedroom designs will almost certainly result in commercial funding. This can result in higher interest rates, stricter lending criteria, and lower loan-to-value ratios (LVR).
Loan to Valuation Ration (LVR) - between 70-90%
Interest Rate - Most likely commercial 7.50%+
Dual occupancy properties consist of two separate dwellings on one title. Most lenders still view dual occupancy properties under residential lending criteria, especially if both dwellings are rented to long-term tenants. For owner occupiers who decide to rent out the secondary dwelling, the additional investment rent will provide higher serviceability when obtaining a loan.
Loan to Valuation Ration (LVR) - between 80-90%
Interest Rate - Residential 6.30%+
Co-living properties, designed to cater to multiple tenants sharing communal areas, are becoming increasingly popular. However, their higher density and management requirements can make financing more challenging. Most lenders will allow residential financing despite multiple tenanats living in the same house due to the fact that the design of the house is residential with standard family home layouts. This house type can easily be rented out to a single family.
Loan to Valuation Ration (LVR) - between 80-90%
Interest Rate - Residential 6.79%+
NDIS (National Disability Insurance Scheme) properties offer a unique opportunity for investors seeking high yields. These properties provide housing for individuals with disabilities, with income streams backed by the government. While this may seem attractive, financing can still be tricky. Most lenders require commercial finance due to the specialised nature of the property and the need for custom construction to meet government standards. The good news about obtaining funding for an NDIS property is that lenders will often allow the government funding in your serviceability calculation and the commercial lending rates are similar to residential rates.
Loan to Valuation Ration (LVR) - between 80-90%
Interest Rate - Commercial 6.79%+
Duplex properties consist of two properties that can be subdivided into two separate titles and are relatively straightforward in terms of financing especially when the cost of subdivision is included in the building contract. Many lenders offer standard residential loans for duplexes, even if you're subdividing or renting out both sides on a long term rental arrangement.
Loan to Valuation Ration (LVR) - between 80-90%
Interest Rate - Residential 6.30%+
Short term rental properties are fully furnished standard residential properties in high demand locations that are rented out through Airbnb on a short term basis achieving much higher yields than on a long term basis. Finance is straight forward with standard residential options available as the property can be easily switched between short term and long term letting. Lenders will calculate your serviceability based on the long term rental assessment.
Loan to Valuation Ration (LVR) - between 80-90%
Interest Rate - Residential 6.30%+
The structure in which you purchase the property also affects financing. Buying in a trust rather than in your own name offers benefits such as asset protection and flexibility with distributing income, but it can complicate lending. Lenders tend to see trust structures as more complex and risky, often requiring larger deposits, commercial loan terms, or higher interest rates. Trust loans may also have tighter scrutiny on serviceability and cash flow, which can impact borrowing capacity. The only exception to this is when you purchase an NDIS property in a trust. Some lenders are willing to provide commercial funding to a trust structure without the need to conduct a serviceability test on shareholders in the unit trust.
With higher deposit amounts and interest rate +1% for commercial property your financing options for different investment property types is critical when calculating your deposit requirements and cashflow. The type of property you purchase may also be limited by your serviceability so you need to also take this into consideration.
If you would like to know more about how to finance one of these property types then contact us and we can put you in contact with one of our trusted finance partners. Alternatively you can book an initial consultation with us to learn more about positive cashflow property.
Disclaimer: (i) This article was written on 9 September 2024 when the cash rate was 4.35%. (ii) Lending rates are always subject to change. (iii) The Property Room does not have a credit license and has relied on general information available in the public domain to write this article. (iv) Keep in mind that each property investor is different and that you should always seek the services of a qualified finance broker first before making any decision about what property is right for you.
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