Buying a dual key unit for renting out

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Hugo
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Joined: Fri Jul 19, 2013 2:35 am

Buying a dual key unit for renting out

Post by Hugo »

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I am a fulltime Project Manager at an IT company with an annual salary of $150,000. I have been looking into investing in real estate for the last few months and found this dual key unit with the help of a real estate agent. I had spoken to my agent that I would be applying for a loan to buy the unit but he mentioned that it may not be easy to get a home loan for it and that I should seek some more advice about it which is how I found myself here.

In your opinion how difficult would it be to get approved for a home loan to buy a dual key unit? I’m quite interested to buy this property since it is in a good area and the agent has said that it would be easy to find a tenant.

Thanks in advance

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Otto Dargan
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Re: Buying a dual key unit for renting out

Post by Otto Dargan »

Hi Hugo,

Lenders usually do not prefer to approve loans to purchase dual key units since they are not the standard type of unit and most families will not buy them. This makes it more risky for the lender since it would be harder for them to sell it in the event that the borrower defaults on his repayments.

As an investment property however, dual key units can be a good idea because you can possibly rent it to two different tenant parties with each unit being occupied by one party.

In any case to get approved for a home loan to purchase a dual key unit, you need to consider the property’s size, location and loan amount:
  • Size – It should be over 50 m sq including both balconies and car spaces (if any)
  • Location – High rise units will be allowed on a conditional basis
  • Loan amount – You will only be allowed to borrow 95% of the property price in your loan
Keep in mind that you will still need to meet other standard lending criteria regarding proof of genuine savings, your credit history, proof of income, etc.

Cheers,
Otto
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mynameisSAM
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Joined: Thu Jun 27, 2013 3:46 pm

Re: Buying a dual key unit for renting out

Post by mynameisSAM »

Hi I became quite curious after hearing this term “dual key unit”, especially the part about how you can rent it out to different tenants. Could you please tell me more about it? As for myself, I have dabbled very lightly in property investing and I own a couple of units I rent out to uni students in Sydney.

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Otto Dargan
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Re: Buying a dual key unit for renting out

Post by Otto Dargan »

Hi and welcome to the forums mynameisSAM,

A dual key unit is a special type of unit where the main space includes a smaller studio unit which has its own kitchen, bedroom and bathroom albeit smaller in space. The property comes under a single title deed and both sections have their own keys but share a common foyer.

Some people like to buy a dual key unit so that they can live in one space and rent the other space while investors prefer being able to rent it out to two different tenant parties. There are also some cases of buyers who let their children use the studio unit to give them a sense of privacy.

If you do look up dual key units for your next investment, remember the following tips to ensure that you make good on your investment:
  • Location – Location is the first concern you should have especially if you intend to rent it out. Think about your potential tenants and if any of them would live in that area.
  • Price – Dual key units can cost more than standard units or even a small house since not only does it contain an additional bedroom, but it also comes with an extra kitchen and bathroom.
  • Maintenance fees – These units will also cost you more to maintain than a standard unit.
  • Space – Some of these units can be a little small and you should consider the potential issues of sharing the space with a tenant.
  • Limited appeal – As I mentioned already, dual key units are not your standard unit and will not appeal to all buyers.
Cheers,
Otto
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Hugo
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Re: Buying a dual key unit for renting out

Post by Hugo »

What other lending criteria do you think I should be concerned with in that case? As far as I know, I have not had problems with my bank or with my income. Just to let you know, the unit that I have in mind is costing about $750,000. I have quite a bit saved up but I rather keep some aside and use the rental payments to pay for the mortgage.

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Otto Dargan
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Re: Buying a dual key unit for renting out

Post by Otto Dargan »

Hi Hugo,

It largely depends on how much you want to borrow, since the larger the loan amount, the riskier the loan is considered and the stricter the lender will be in assessing your situation.

First let’s talk about genuine savings:
Genuine savings are usually required for any loan amount 85% however most lenders will still want to see that you have saved up money on your own. This is to see how well you manage your money and measure how reliable of a borrower you are.

Lenders also require proof of genuine savings in order to make a claim on their mortgage insurance policy in the event that the borrower defaults. Here if the lender did not get proof of genuine savings and still approved the loan, they will not be able to get any money from the insurance company.

Any savings which you have held or accumulated for at least three months can be term as genuine savings. This also includes term deposits, shares or managed funds held for the same period of time. You can also use your equity in any real estate or even proof of rental payments over a three month period.

Lenders will usually require to have saved up at least 5% of the property value in genuine savings. If you have more than one of the above, you just need to make sure that they add up to more than 5%.

Secondly we have credit score:
Your credit score is a computer generated figure which tells the lender how risky you are as a borrower to them. The lenders use a variety of information from your credit history (including VedaScore), history with them, employment stability, residential history, asset position, current liabilities, borrowing power, loan size, and loan purpose among others to calculate this score.

Common reasons of failing a credit score which could result in you getting declined for a home loan could be bad credit history, lack of genuine savings, missed payments, defaults, etc. All lenders have different ways of credit scoring, for e.g. one may consider borrowers who have changed jobs while another may require to be working in the same place for at least six months.

In case you have had credit problems before but have been managing your funds properly recently you can still apply with a lender who does not credit score. This is because they will be more willing to look past your history as long as your current situation is favourable.

Lastly you will also need to show valid proof of your income, assets and liabilities to show them that you can afford the loan and that you are not hiding anything. For this you will usually asked to provide your payslips, tax returns, a letter from your employer. You should also be able to provide bank statements showing your savings and also your rental payments if required. There also alternate ways to verify income if you cannot satisfy these requirements. You will also need a valid form of identification such as your driver’s license, passport, Medicare, etc.

If you think you will have any problems with any of these, speak to your mortgage broker or financial planner. We are also available to give you advice during working days on 1300 889 743. You can also send us a online enquiry if you are not free and one of our mortgage brokers will contact you.

Cheers,
Otto
Otto Dargan
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P | 1300 889 743
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Hugo
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Joined: Fri Jul 19, 2013 2:35 am

Re: Buying a dual key unit for renting out

Post by Hugo »

Thanks for the information Otto but how do I see my credit score without applying for a home loan at the bank itself? I don’t have any friends or contacts in the industry or a financial planner at the moment so I wouldn’t know who to contact for this.

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Otto Dargan
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Re: Buying a dual key unit for renting out

Post by Otto Dargan »

Hugo, you can give our credit score calculator a try. It actually uses a process similar to what the actual lenders use so the result should give you a good idea about your current credit score.

If you like, you can opt to email us your results directly at the last option while using the calculator so that we can get a better idea about your situation and give you better advice.

Cheers,
Otto
Otto Dargan
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P | 1300 889 743
Home Loan Experts

Hugo
Posts: 54
Joined: Fri Jul 19, 2013 2:35 am

Re: Buying a dual key unit for renting out

Post by Hugo »

I will do that, thank you for helping me with this :)

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