Expert Advice with Kate Forbes 10/01/2018
On the hunt for a new investment property?
Hoping to secure finance at a great rate so you can be on your way to property-mogul status?
If you’re considering buying any of the property types below, you might want to reconsider.
Banks can be extremely fussy when it comes to lending money for a mortgage on risky or unusual properties.
And this is only likely to increase with regulations from APRA making further restrictions on investment lending.
With certain properties, you might find it difficult to get approved for a high-LVR loan and be forced to save for a bigger deposit, while others may have the bank heading for the hills altogether!
Here’s a list of five types of properties your bank may consider too precarious to approve – and why you might be better off avoiding them altogether.
After all, if it’s not safe enough for the bank, do you really want to take the gamble?
1. Off-the-plan developments
We’re in the thick of an apartment-building boom, and in some of the major capitals, oversupply is seriously damaging resale values and vacancy rates.
One of the problems here is that the bank could find itself over-exposed if it finances too many properties in a high-density area.
So, to reduce the risk to them, they’ll set a cap on the number of loans they are willing to approve in that area.
Generally, if you’re only borrowing 70% of the purchase price, the bank will be more comfortable with the level of risk.
Remember, though, that off-the-plan units are generally not considered investment grade properties – regardless of the market cycle.
If the banks don't like them - neither should you!
2. Rural towns
This is simply a numbers game.
There is usually a smaller pool of potential tenants (and down the track, potential buyers) in rural areas, and the rental market could be highly dependent on local industries.
If, for example, a big factory that employed much of the town was to close, your tenant base would diminish instantly – as would their ability to pay the rent, and the property's resale value.
Add to that risks of bushfires and floods, which will not only scare the bank but also push your insurance premiums sky-high, and you might find it’s more prudent to invest in a proven and stable inner-city market.
3. Student accommodation and serviced apartments
It sounds so promising, investing in a property that also has a business element attached, but there are a number of issues with these properties.
For a start, they’re all owned by investors – which means when you come to sell, you’re cutting out a chunk of potential buyers, as owner occupiers can’t buy in.
You’re also stuck with the management company who looks after the building, and their associated costs, which can be pretty expensive.
Unlike a regular apartment, where you could score a long-term tenant, serviced apartments are reliant upon tourists, students, and business guests booking shorter stays, so there’s a much greater risk of vacancy.
The viability of student digs can be affected by holidays, as well as any government changes involving fees, financial assistance and international student policy.
Both student accommodation and serviced apartments also tend to include furniture as part of the purchase package – which break and depreciate, two things banks do not enjoy!
4. Small studios
A small apartment with a footprint of less than 50 square metres (not including any balcony space or car parking area) can be really tricky to get past the bank.
Why is that?
Quite simply it's because while minimalist living is starting to take off, the marketability of a teeny apartment is seriously limiting.
They are pretty much only attractive to single people, especially if there’s no separate sleeping quarters, plus the potential to renovate or improve them is minimal.
In the event that you default on your loan and the bank needs to recoup its costs, there are only a handful of buyers they can hope to sell to, making this a risky proposition from their perspective.
5. Mining and tourist towns
Tourist hotspots are vulnerable to seasonal fluctuations in population, while mining towns are at the mercy of government regulation and job losses.
It’s really a case of extremes – at the peak of the market, there’s no place you’d rather be, but when times are bad, they can be devastating.
You only have to look at the demise of the mining boom in Western Australia to see why a bank could be hesitant to finance such a property.
An area with steady, stable and sustained growth over time is a much safer investment – for the bank, and for you!
The bottom line is...
All of the properties mentioned above are on the radar of some buyers every year – but they really shouldn't be.
Sophisticated investors understand that the best investment properties are the ones that are investment grade, will outperform the averages in the years ahead, and are also strong and stable.
And it's those types of properties that banks generally have no problem lending you money to buy.
Kate Forbes is a National Director at Metropole Property Strategists. She has 15 years of investment experience in financial markets in two continents, is qualified in multiple disciplines and is also a chartered financial analyst (CFA).
She is a regular commentator for Michael Yardney’s Property Update
Read more Expert Advice from Kate here!
Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.