5 types of properties the banks consider “risky”

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?  39653963_l

Well if you’re considering buying any of the property types below, you might want to reconsider.

You see… currently the banks are being extremely fussy when it comes to lending money for a mortgage on what they consider risky properties.

And if the banks are concerned about these types of properties so should you be – there’s no point trying to outsmart the lenders.

The point is that for some 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!

So here’s a list of five types of properties your bank may consider risky – and why you might be better off avoiding them altogether.

As I said, 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 lifting vacancy rates.  

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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 their risk, banks set a cap on the number of loans they are willing to approve in that location.

And even if they will lend you for your proposed off the plan purchase, you can’t get a pre-approval (they only last 90 days) and generally, they’ll lend a maximum LVR of 70% or less.

And remember… 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 or regional towns

This is simply a numbers game.

There is usually a smaller pool of potential tenants, and even more importantly, potential buyers in regional areas.

Plus there tend to be fewer growth drivers and the rental markets tend to be more dependent on local industries.

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’ll find it’s more prudent to invest in a proven and stable inner- and middle-ring suburbs of our capital cities.

3. Student accommodation and serviced apartments

It sounds so promising – investing in a property that also has a business element attached. 35519396_s

Now I can understand why for risk adverse investors who fret about things like extended vacancy periods, rental guarantees could tempt them into considering a serviced apartment.

However they may not realise the sacrifices they are making for that so-called security.

For a start, they’re all owned by investors – which means when you come to sell, you’re cutting out a huge chunk of potential buyers, as owner occupiers wouldn’t buy this type of property.

You’re also stuck with the management company who looks after the building, and their associated costs, which can be pretty expensive.

The banks consider serviced apartments to be a niche type of property and since they don’t see them as great investments they usually require investors to fork out a deposit of around 40%.

This means investors need to contribute a larger deposit.

The specialised nature of this type of property and the larger cash injection investors need to contribute if they want to buy a serviced apartment or student accommodation means you will always have a smaller secondary market to sell to if ever you want to exit your investment.

This makes for the banks a little nervous and maybe you should also feel the same.

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. apartment

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… 3 toxic habits that sabotage your property investing

I’ve found that the properties mentioned above seem to be 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, because they have strong appeal to a wide range of affluent owner occupiers and therefore will outperform the averages in the years ahead.

And it’s those types of properties that banks generally have no problem lending you money to buy.

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About

Kate Forbes is a National Director Property Strategy at Metropole. 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).
Visit www.MelbourneBuyersAgent.com.au


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