Additional properties, rent, and getting additional properties

[syntax]

So,

We have our property, we have a second that has a tenant (who is a family member who is going to be renting from us till they die).
We would now like to buy a third, and rent out our first property.

All the rent covers the property costs except for around R1500.

The new property is quite expensive. We can afford it, but, if we have an issue with one of the tenants, it will be tight. If we have an issue with both, we will fall short. How does the bank factor in tenants / rentals when applying for a new bond, and is it possible to give them something that says we have a tenant who is guaranteed to stay in our property in order to get the new bond approved?

Anyone have any experience with this kind of situation?

 

[MKFrost]

Maybe not what you want to hear but if you get involved with property, for the long-term, then you need to structure your things in such a way that you can go without at least 3 to 6 months rental income on half of your rental properties.

What is the possibility of maybe raising the rent on the other properties? Or add more deposit if you can on the new property to get the payment lower.

You have to start building up a cash buffer, things never go as planned, especially so when dealing with other people.

Edit: A signed lease agreement is not a guarantee and the bank will not take it as such. On commercial property they will but doubt whether they will factor that in on your residential property.

 

[saturnz]

I think a bank will consider 70% of annual rental income in deciding on how much of a loan to extend.

There also exists insurance products to protect you against the loss of rental in the year so this is also something to consider in mitigating the risk of a loss of income.

Property management is not easy, and its far from passive the more properties you acquire.

 

[Velenoso]

The bank will consider your rental income.

Agreed, you need a bit of a cash buffer. I had a team of "debt-collectors" I used to evict rouge tenants in the past, this is becoming less necessary now that we can do credit checks, etc

You need to have the place tenanted all the time or you can come short. Don't forget repairs and general maintenance.

 

[Greg C]

I think a bank will consider 70% of annual rental income in deciding on how much of a loan to extend.

There also exists insurance products to protect you against the loss of rental in the year so this is also something to consider in mitigating the risk of a loss of income.

Property management is not easy, and its far from passive the more properties you acquire.

Your questions are all relevent. Let me answer as I work for the bank(name wont be mentioned).
Just to state, Dont know where the above person got 70% but it has nothing this percentage has nothing to do with the rentals.

70% is the value we take on the property in the banks value on a residentially zoned property.

In terms of rental; we have it as 1.1 cash coverage.Must be able to service at 1.1 over and and above the bond repayments. We look at an empty tenant risk of a few factors. How long are the lease agreements. How many tenants and the ability to pay back ie history of tenant. The affordability or cash coverage SHOULD the tenant not renew and the ability to regain a new one.

Work on a 1.1 cash coverage.

 

[saturnz]

the 70% is when you apply for a bond and they ask for your income sources, if you have as a source of income a rental that produces 10k pm they will use 7k in determining the amount of the loan to be issued.

I applied for a mortgage three years ago and when I put on the application my rental income this was told to me by three banks and the originator I finally ended up using.

in this example the 10k rental would be a gross figure, you would have to deduct income tax, municipal taxes etc and the net figure would be significantly less, added into the equation over a period of 20 years is the possibility that the property may be vacant for a few months so the 70% is more realistic for a bank to make its assessment and made sense to me at the time.

 

[syntax]

OK, thanks for the feedback guys.
I feel a little better knowing that the rental income will at least be considered when applying for a 3rd property.

I do have a cash buffer that will be in place should a tenant not pay or we not have a tenant for a period of time, so hopefully this gives the bank a bit of confidence

 

[bokka1]

The banks do take it in consideration but the rental income carries less weight than your normal income.

If you have good tenants then you won't have any problems, just do a thorough credit check on them.

 

[Dr Who]

I have just purchased my new place and have kept my old Flat with tenants in it. It seemed my Bank was more concerned ( in a good way ) with the spare equity in the first property as I owed less than 20% of the original purchase price.

I hope this helps.