Quick answer
An investment property can secure a private business loan in the same way as a home, through a caveat, second mortgage or first mortgage. Many owners prefer it because it keeps the family home out of the deal. Lenders value tenanted residential property much like owner-occupied property, and the rental income can help demonstrate that interest can be met during the term.
Key points
- Keeps the family home separate from business borrowing
- Tenanted residential property values much like owner-occupied
- Rent can support interest payments during the term
- Check the existing investment loan for consent requirements
- Structures
- Caveat, second or first mortgage
- Loan size
- $20,000 to $5,000,000
- Tenancy
- No problem for most lenders
- Exit options
- Sale, refinance or income
If you own a rental property, it can be the ideal security for a business loan. It’s still residential, so lenders like it, but it isn’t where your family lives. For many owners that separation makes the decision much easier.
Why owners choose an investment property
- Peace of mind. The family home stays out of the business’s borrowing.
- Easy to value. Tenanted houses and units in established areas value much like owner-occupied homes.
- Income during the term. Rent can contribute to monthly interest if that’s how the loan is set up.
- A natural exit. If the plan was always to sell the property eventually, the loan can be repaid from that sale.
How lenders view tenanted property
A residential tenancy rarely reduces value or lending appetite. The valuer will note the lease and the rent, and may need access arranged through the property manager. Things that can matter more:
| Factor | Why it matters |
|---|---|
| Lease ending soon | Little effect, though a vacant property is easier to sell |
| Long fixed lease | Can slow a sale exit if vacant possession matters to buyers |
| Short-stay or holiday letting | Some lenders value these more cautiously |
| Condition | Deferred maintenance can lower the valuation |
| Location | Regional and small-town property may have lower LVR limits |
Structures that suit
- Investment loan in place, want to keep it: second mortgage or caveat loan
- Property owned outright: private first mortgage, often the cleanest option
- Several investment properties with modest equity each: security over more than one property
Check the existing investment loan
Many investment loans, like home loans, require the lender’s consent before further security is granted. Read your loan terms or ask your bank. If consent is required and slow, a caveat loan may bridge the timing, depending on your state.
Land tax, rates and other charges
Private lenders check that council rates, water and land tax on the property are up to date, because some unpaid charges can rank ahead of a mortgage. Clearing any arrears from the loan at settlement is common.
Tax treatment
Deductibility of interest generally follows the use of the borrowed money, not the property that secures it. If the funds go to the business, the interest is usually a business expense. Your accountant can confirm how to structure and record it.
A worked example: the rental unit funds the fit-out
A Sunshine Coast café owner signed a lease on a second site but found the fit-out quote had grown to $310,000. Her bank was happy to lend for the business, but only after the new site had traded for a year. She owned an investment unit in Maroochydore worth about $720,000, with $340,000 owing to a bank.
A private lender took a second mortgage over the unit for the full fit-out amount. The combined loan-to-value ratio was a little under 90 percent, which the lender accepted because the unit was a well-located, standard two-bedroom apartment with strong rental history. The tenant stayed in place and the rent kept covering the first mortgage.
The term was twelve months with interest capitalised, so the café’s cash flow went into stock and staff rather than loan repayments. Once the second site had six months of trading figures, her accountant prepared interim accounts and the bank refinanced both loans into one facility.
Before you offer a rental as security
Run through these with your accountant or adviser:
- whether the first mortgage allows a second mortgage, or needs the bank’s consent
- whether the lease runs past the expected loan term, which helps the valuation
- how land tax, strata levies and rates will be paid while the private loan runs
- whether interest on the private loan is deductible given it funds the business, not the property
- what happens if the tenant leaves and the rent stops
A tenanted property with a long lease and a reliable tenant is usually viewed well. A vacant property is still fine, but the lender will think harder about the exit.
Also check whether the rental is held in your own name, a trust or a company, because that decides who signs the mortgage and who gives guarantees. If several people own it together, every owner will need to agree and sign.
See what your investment property could do
Tell us the property’s value, the existing loan, the rent and the amount the business needs. We’ll come back with a realistic view of what’s possible. There’s no credit check when you first enquire, and your file isn’t scattered across lenders.
Accurate figures, including any lease details, help us match you properly the first time. See if you qualify, or read about releasing equity and then send us the details.
Frequently asked questions
Does the tenant need to know?
Generally no. A caveat or mortgage on title doesn't change the lease. The valuer may need access for an inspection, which you'd arrange through your property manager with the usual notice.
Can I sell the investment property to repay the loan?
Yes, and that's a common exit. The lender will want a realistic timeline, allowing for any lease in place and the time it takes to sell a tenanted property.
Is interest on the business loan tax deductible?
Interest on money used for business purposes is generally deductible to the business, regardless of which property secures it. What matters is the use of the funds. Confirm the details with your accountant.
What if the investment property is negatively geared?
That's fine. The lender focuses on equity and the exit. If you're paying interest monthly, it will look at whether the business or other income can cover it.