First-time management letting rights buyers are often told to expect a lending limit of around 70% against the MLR business. While that may be a relevant starting point when the business is the only security, it does not always reflect a buyer's complete financial position.
In this case study, our clients initially believed their available cash limited them to a management letting rights purchase of approximately $1.5 million. After we assessed the equity in their owner-occupied home and investment property, they were able to consider a broader finance structure.
The final outcome was the purchase of a $2 million MLR business in Calamvale, supported by finance structured at 85% of the purchase price and a lower cash contribution than the clients had originally expected.
This result was specific to the clients' circumstances, security position and lender approval. It illustrates why buyers should have their complete financial position assessed before setting
The clients: first-time MLR buyers with a $1.5 million budget
The applicants were preparing to purchase their first management letting rights business. Based on the lending information available to them—and conversations with friends who had recently purchased an MLR—they understood that they could borrow no more than 70% of the business purchase price without offering additional security.
That assumption appeared reasonable. Many MLR transactions require a substantial cash contribution because lenders assess the goodwill component differently from standard residential property.
Based on the clients' available deposit and their understanding of the lending limit, they set an initial purchase budget of approximately $1.5 million. Their search focused on opportunities that fitted within that amount and could provide a suitable return for their family.
Before they committed to a business, however, we completed a broader assessment of their assets, liabilities, cash flow and available security.
For an introduction to how these transactions are assessed, see our guide to management letting rights finance.
Why a standard MLR lending limit may not show the full picture
An MLR loan is not assessed in the same way as a standard home loan. Depending on the transaction, lenders may consider:
- the value and quality of the MLR business;
- verified net profit and the applicable multiplier;
- the remaining term of the management and letting agreements;
- the size and stability of the letting pool;
- whether the complex is permanent, holiday or serviced accommodation;
- the value of any manager's unit included in the transaction;
- the buyers' experience, qualifications and financial position; and
- the type and value of security available.
If the MLR business is the only security, a lender may require a larger deposit. When a buyer owns other property with usable equity, additional structures may be available, subject to serviceability, valuation, lender policy and credit approval.
This does not mean every property owner can borrow more, or that using additional property as security is always appropriate. It means the entire position should be assessed before a buyer assumes that one standard percentage determines the maximum purchase price.
Identifying usable equity in the clients' properties
During our assessment, we identified substantial equity in both the clients' owner-occupied home and their investment property. They had not previously included this equity when calculating their potential MLR budget.
Property equity is broadly the difference between a property's value and the debt secured against it. The amount a lender is prepared to recognise as usable equity can be lower and will depend on matters such as valuation, acceptable LVR, existing loans, serviceability and lender policy.
By considering the clients' overall property portfolio rather than the MLR purchase in isolation, we explored whether their existing properties could provide additional security for the business acquisition.
Under the proposed combined-security structure, the potential total funding could be equivalent to as much as 105% of the MLR purchase price. This was not a 105% loan against the MLR itself. The additional funding capacity depended on equity in the clients' other properties and remained subject to valuation and formal approval.
The proposed structure gave the clients the option to retain more of their cash rather than contributing all available funds to the purchase. Preserving cash was important because a newly acquired business may require working capital for operating expenses, professional fees and unexpected costs.
Using upfront valuations to improve certainty
Before the clients committed to an MLR purchase, we helped arrange upfront valuations of the relevant properties.
This step gave the clients a clearer indication of:
- how much equity a lender might recognise;
- the likely overall security position;
- the possible cash contribution;
- whether the proposed structure remained realistic; and
- which purchase opportunities could be considered.
Valuations are not loan approvals, and a lender can still decline or change a proposal after completing its full assessment. Even so, obtaining valuations early reduced the risk of setting a budget based solely on estimated property values.
For first-time MLR buyers, early valuation and finance discussions can be especially useful before signing an unconditional purchase contract. Buyers should also obtain independent legal, accounting and business advice on the proposed acquisition.
Moving from a $1.5 million budget to a $2 million opportunity
Once the additional security options had been assessed, the clients no longer needed to restrict their search automatically to the original $1.5 million budget.
They could consider larger MLR businesses with stronger income potential, while still evaluating whether each opportunity suited their experience, cash flow and lifestyle goals.
The clients ultimately selected a management letting rights business in Calamvale with a total purchase price of $2 million. The location was attractive because it was closer to their children's school and other family members, giving the acquisition both commercial and personal benefits.
We assisted with a finance structure equivalent to 85% of the purchase price. Because the structure also considered the clients' broader security position, they were able to make a lower cash contribution than they had originally expected while retaining more financial flexibility.
The outcome should not be treated as a standard MLR LVR available to all borrowers. MLR lending policies vary, and the amount available will depend on the transaction, security, income, lender and applicants.
Refinancing the existing home loan to support cash flow
The MLR acquisition was only one part of the clients' overall financial position. We also reviewed their existing home loans and assisted with refinancing and extending the loan term.
The purpose of this restructure was to reduce required monthly repayments and improve cash flow as the clients began operating the new business. Retaining additional cash flow can be valuable during an ownership transition, when costs may include training, staffing, maintenance, professional advice and day-to-day working capital.
Extending a loan term can reduce the regular repayment, but it may also increase the total interest paid over the life of the loan. We discussed this trade-off as part of the proposed structure rather than treating a lower monthly payment as the only objective.
Homeowners considering a similar strategy can learn more about refinancing a home loan and accessing equity. Residential and commercial lending should be structured carefully, with the purpose, security and long-term costs clearly understood.
The result
By assessing the clients' full financial position, the transaction progressed beyond the assumptions used for their initial budget.
The clients were able to:
- purchase a $2 million MLR business rather than remaining limited to a $1.5 million search range;
- secure a business with stronger income potential in a location better suited to their family;
- use equity in existing properties as part of the overall security strategy;
- obtain upfront valuations before committing to the purchase;
- structure finance at 85% of the purchase price, subject to the approved transaction structure;
- contribute less cash than they had originally expected; and
- improve monthly cash flow by refinancing and extending the term of their existing home loan.
Most importantly, the clients made their decision using a more complete understanding of their assets, debts, available equity and likely finance structure—not only a general assumption about the maximum percentage available against an MLR business.
What first-time MLR buyers can learn from this case
1. Do not set the final budget using one lending percentage
A commonly quoted MLR lending limit may apply to a particular lender, business type or security arrangement. It may not reflect other assets that could form part of an appropriate structure.
2. Assess usable equity before making an offer
An estimated property value is not the same as a lender valuation. Early valuations can help buyers understand whether the proposed contribution and security structure are realistic.
3. Preserve enough working capital
Using every available dollar as a deposit can leave a new business with limited flexibility. Acquisition costs, professional fees and operating expenses should be considered when determining the desired cash contribution.
4. Consider the complete cash-flow position
The new commercial loan cannot be viewed in isolation. Existing residential loans, personal debts, living costs and business cash flow all affect the sustainability of the structure.
5. Obtain specialist advice before signing
Management rights acquisitions can involve business finance, property security, licence requirements, body corporate agreements and due diligence. Buyers should obtain lending, legal and accounting advice before committing to a contract.
If you are considering other types of business or property funding, you can also review our commercial and business loan options.
Planning an MLR purchase?
If you are considering purchasing a management letting rights business, it can be helpful to assess your complete financial position before setting a final budget or signing a contract.
Smart Mortgage Corp's management rights specialists can review the proposed business, available cash, existing property equity and potential lending structures, then discuss suitable options from our lender panel.
Speak with a management rights finance specialist before committing to your purchase.
Important information: This case study is an anonymised example provided for general educational purposes only. It does not constitute financial, legal, accounting or credit advice, and it does not guarantee that another borrower will obtain the same outcome. Lending criteria, valuations, interest rates, fees and approval conditions vary. Any credit application is subject to lender assessment and approval. Consider your objectives, financial position and needs, and obtain appropriate independent advice before acting.