Structuring Finance for an Investment Property

Investment financing is assessed differently from a home purchase. The sequence that gets the structure right.

Financing an investment property involves a different assessment from financing a home, because the income the property produces is part of the picture and the risk profile differs. Structuring it well at the outset affects returns for the whole holding period.

Before stage one

Before applying, you need a realistic view of the rental income, the operating costs and how the obligation is serviced if the property is vacant.

• Evidenced rental expectation from comparable properties, not from the seller.
• Operating costs including management, maintenance and vacancy allowance.
• A source for servicing the obligation during vacancy.
• An understanding of how the financing affects your capacity for future purchases.

Stage 1: Model the property first

Build the income and cost model before considering financing, so you know whether the asset works on its own terms.

• Deliverable: A net income figure based on evidenced rent and realistic costs.
• Owner: Investor.
• Approval gate: Proceed only if the property is sound before financing is considered.

Stage 2: Determine the structure

Decide the amount, term and how much equity to commit, considering both cost and resilience.

• Deliverable: A financing structure with its effect on net income shown.
• Owner: Investor.
• Approval gate: Structure chosen from the model, not from the maximum available.

Stage 3: Compare providers

Obtain offers and compare total cost, conditions and any restrictions relevant to letting the property.

• Deliverable: A comparison on identical amount and term.
• Owner: Investor.
• Approval gate: Conditions affecting letting identified before selecting.

Stage 4: Stress test the position

Test the obligation against vacancy, a rate increase and a significant repair occurring in the same year.

• Deliverable: A stress test with the shortfall quantified and a funding source identified.
• Owner: Investor.
• Approval gate: The position remains serviceable under the stress case.

Stage 5: Complete and document

Complete the facility and keep the documentation with the property file.

• Deliverable: Facility documentation filed with the property records.
• Owner: Investor.
• Approval gate: Terms understood, particularly anything affecting letting or sale.

Stage 6: Review against performance

Compare actual net income against the model annually, and review whether the financing remains appropriate.

• Deliverable: An annual review of the property and its financing together.
• Owner: Investor.
• Approval gate: The review happens, since financing arrangements otherwise persist unexamined for years.

Handovers between stages

The point most often skipped is modelling the property before considering financing. Investors who start with what they can borrow tend to buy what the financing allows rather than what the analysis supports.

How you know it is finished

The structure is sound when the property works on its own numbers, the obligation is serviceable during vacancy, and the terms do not restrict how you intend to use or eventually sell the property.

If you are weighing a financing decision, Domira can review the offers, model the total cost and stress test the obligation with you before you sign anything.