My Four-Year-Old the Property Investor by Cam McLellan

Author:Cam McLellan
Language: eng
Format: epub
ISBN: 9780992549442
Publisher: The Open Corporation

Debt to service ratio (DSR)

The banks want to know you can make repayments and still have money to live. Each bank has a slightly different way of determining DSR, but generally they want to see that you earn around 1.5 times the interest. Most banks take 80% of rental income into account when assessing your DSR. The actual calculation is your income, including 80% of rental income, divided by all your expenses.

Valuation

It’s important to understand the valuation process. A fair market valuation from a real estate agent assesses what a property would sell for on the open market in a reasonable time (usually 60–90 days). For a bank panel valuation or lenders mortgage valuation the instruction is much different. What the bank request is the figure that the property will sell for on Monday 9am. Obviously there will be a big difference between the two figures. 5–10% difference is expected. Anything more is sign that something is wrong. When you deal with a bank’s consumer area, you may not be able to control the valuation process, but I strongly suggest you try.

Compile data on sales comparable to the investment you plan to buy and give it to the bank when you apply. Try to get the valuer’s details. Make sure they have your sales data and know the valuation figure you wish to achieve.

It’s far easier to give comparable sales data before a valuation than to move them up from a poor one. It’s up to your bank or broker to go into bat for you if a poor valuation comes in.

Valuers get paid regardless of what price they put on your property. And they always go low unless you provide comparable sales data. Some valuers and banks do in-house ‘desktop’ valuations (meaning they don’t leave their desk to carry it out). They simply use median house prices, other limited data and analytical programs. This is another reason you need to show the valuer comparable sales. The easier you make their job, the better.

If a bank needs to call in a loan on a property owner who fails to meet repayments (a mortgagee sale) the valuers may be financially liable if they’re found negligent in their assessment of the property’s value. They, or their insurance company, pay the difference unless they can show similar sales or other evidence to support their valuation.

Here’s an example of how vital it is to control the valuation process. Say you need a deposit of 10% to buy an investment property. If you have five investment properties, each valued at $400k for a total of $2m, you need just a 2% increase in value across your portfolio to buy another $400k property. Because that 2% increase gives you another $40k (10%) deposit! But if you fail to control the valuation process, you don’t get the additional amount required for deposit, meaning you can’t duplicate.

Valex is making it much harder to ensure a reasonable valuation, because it limits prior communication with valuers.

‘Dad, what’s Valex?’ It’s not a valuation firm as it doesn’t do valuations.

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