Income property refers to a property that is used purely as an investment and is rented out. In addition to purely residential properties, rented office properties and commercial properties are also referred to as income properties. With a long-term investment horizon, income properties are an extremely sought-after alternative to traditional capital investments.
Guidelines for the financing of investment properties
The maximum loan-to-value varies between 50-80% depending on the income-producing property. At the same time, the mortgage must be self-sustaining: The rental income must cover the interest costs (imputed interest rate depending on the bank approx. 5%), the amortization (1%) and the maintenance costs (1%) exceed.
The financial institution usually also checks the gross yield of the property when granting the mortgage. The gross yield of an investment property is calculated as follows: Rental income in relation to purchase price. A higher purchase price means a lower gross yield if rental income remains the same.
When financing income properties, in most cases the borrower must open the rental account, where the rental income is received, with the lending bank.
Estimating the market value of an income property
During the credit check, the bank usually arranges for a market value appraisal to determine the market value of the property. The following factors play an essential role in the evaluation of an investment property:
- Location (public transport connection, shopping facilities)
- Year of construction and building fabric
- Condition of the property and any renovation requirements
- Any vacancies in the investment property
The market value of an investment property can be calculated in various ways. Further information on the subject of market value estimation can be found in the corresponding article. The market value of the property is decisive for the loan to value, the bank will finance 50-80% of the market value in the form of a mortgage, depending on the property.
Financing an investment property with a favorable mortgage?
A yield property can be financed with the most common mortgage models. Many borrowers prefer to take out long-term or even very long-term mortgages. This enables long-term planning of mortgage costs. Only a few property owners finance yield properties with Libor mortgages. This is due to the fact that yield properties usually generate a very constant yield. If this yield is offset by constant costs, the difference results in constant profits. The conclusion of a fixed-rate mortgage guarantees the latter to a large extent. For more information on this topic, see the article Mortgage models. In addition to conventional forms of financing, alternative mortgage solutions are available to finance income properties, especially for larger mortgage volumes. Experienced customers can, for example, finance their property by means of a swap mortgage. The mortgage specialists at HypoPlus will be happy to show you the financing options (044 500 71 61).