Why property investors need a rental appraisal letter, and how to get one.
If you’re purchasing an investment property, odds are you’re hoping to generate rental income. The good news is that this rental income can help you before you’ve even bought your property.
When you apply for an investment property home loan, you’ll likely need to provide a rental appraisal letter. The way this letter is structured will depend on whether or not your property already has tenants.
When would I need a rental appraisal letter?
Most lenders will want to see a rental appraisal when you apply for an investment property home loan. This is because your rental income will be taken into account when assessing your home loan.
This is potentially very good news for would-be investors. Adding assumed rental income into your home loan application impacts your serviceability. In other words, it’s counted as more income you’ll have available to repay your home loan. Because of this, your borrowing power is likely to increase.
It’s worth noting that most banks won’t accept 100% of rental income. Instead, they’ll take about 80% of your rental income into account when assessing your serviceability. They do this to allow for untenanted periods, or potential loss of rental income during periods.
How do I get a rental appraisal letter?
You can obtain a rental appraisal letter by having an agent assess your property. They’ll take into account similar rental properties in the area and compare them to your property to estimate the amount of rent you’re likely to receive.
If the property is already tenanted, an agent will be able to provide a letter stating the current amount of weekly rent. They may also state that they believe this amount to be fair relative to the market.
Some lenders may wish to carry out their own assessment. In this case, they will send a valuer to the property to assess the potential rental income. This figure can end up being more conservative than one provided by an agent.
There are also other methods of proving rental income if a property is tenanted. The property manager should be able to provide a rental statement or copy of the lease agreement.
What should I look for in a rental appraisal letter?
A rental appraisal letter will need to include a few details:
- The agent’s letterhead, including contact details
- The date
- The address of the property
- Whether or not the property is tenanted
- The projected rent (if untenanted)
- Comparable properties used to project rent (if untenanted)
- Current rent (if tenanted)
- Agent’s signature
Below are some samples of rental appraisal letters for both tenanted and untenanted properties.
Red Blazer Property Management
To whom it may concern,
We are the managing agents of the property at 123 Fake Street. This property is currently tenanted at a rent of $750 per week. Based on our assessments, we believe this to be a fair market rent.
Joey Joe Joe, Jr. Shabadoo
ABC Property Management
Globochem Property Management
To whom it may concern,
We have appraised the property at 15201 Maple Systems Road and believe this four-bedroom, three-bathroom detached house will generate weekly rent between $650 and $750, particularly with the recently added extra storey. We reached our assessment taking into account the size and condition of the property, as well as comparable rental properties in the area:
742 Evergreen Terrace ($725 per week)
1 Ocean View Drive ($620 per week)
Cnr Croesus and Mammon Avenues ($800)
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