The rental market has changed dramatically over the last decade and as ever, there are a bunch of resourceful people out there finding the best ways to provide a good home and get a good return for their property investment.
When we started out, renting weekly was the only way that you'd generally receive income from your rental property. But now we're seeing lots of changes and the main ones are people moving to Airbnb or Renting by the room to maximise their return. But there are some pitfalls of this when it comes to bank funding.
In this blog we discuss Renting by the Room - If you'd like to see the ins and outs of funding an Airbnb then click this link.
For those of you not familiar with this, in this situation a landlord will have tenancy agreements with each of the individual tenants and they will simply rent a room in a house, rather than jointly renting the house as a collaborative group of flatmates.
Generally the landlord will provide a semi furnished house and room. They will cover the power and internet and charge the tenant an "all inclusive" price each week.
This suits a lot of tenants who don't want to be bogged down with utility bills, long term contracts and the hassle of finding a group of people to rent a house together.
Unless you've been doing this for a number of years already and can show the bank a summary of your income and expenses (the bank will just use the profit amount as income) the bank are unlikely to use the income from renting by the room, but rather the rental income that would be received if the house was rented out as a whole.
The effect this has is that although you may be seeing a great return in reality, the debt servicing required to get a mortgage may see you with quite a shortfall and it might make funding this type of property impossible. As always, it's good to check first and get a pre approval in place.
Also, sometimes these situations occur in a specializsed "Hostel" type house where each room has it's on ensuite and is set up much more like a hostel living situation than a normal family home.
These properties can be questioned by the bank as the residual value of the property may be lower than a family home since it may not suit as wide a market if it was sold. This could see a reduction in value if there was a forced sale.
If the bank sees that property as more of a "boarding house" than a standard house, then they might look to reduce the LVR they can lend to, and in some cases treat that property more like a commercial-type arrangement which can have implications for interest rates and the availability of interest only loans.
In summary, there are definitely opportunities to think outside the box and make a better return on your investment but you should be doing your research and discuss with us how the specific property sits with your overall plans and portfolio from a lending perspective. If we can present a good loan application and meet the bank's requirements it can be the difference between success and failure.
We'd love to hear from you if you're thinking about an investment like this.
Simply contact us or email office@mymortgage.co.nz
We look forward to talking to you soon
Adam, Claire and the My Mortgage team