Islamic investment property finance: how does it work?

At a glance

• Our Ijaar home finance can be used for a home to live in or a residential investment property.
• Your tenant pays rent to you, and you pay rental to the financier for the use of its share of the property.
• Finance for a residential investment is regulated credit in Australia, whatever the Shariah structure.
• Buying commercial property, or buying through your SMSF, works differently: see our Islamic commercial finance page.

Can you finance an investment property the Islamic way?

Yes. Islamic finance doesn't stop you investing in property. What matters is how the finance is structured: the financier's return has to come from a real asset or a real transaction, not from riba, which is any increase charged for lending money for money.

People often search for this as an "Islamic investment loan" or a "halal mortgage for an investment property". With us, it's Ijaar home finance: a lease that ends in ownership, with no interest.

How does Ijaar finance work for an investment property?

It works the same way as Ijaar home finance for a home you live in. The difference is that you rent the property out.

1. The financier appoints you as its agent (wakeel, under a Wakalah agency agreement) to buy the property on its behalf.
2. You're the registered owner on the title from settlement. The financier holds a registered mortgage and a beneficial interest (an ownership share).
3. You pay rental for the use of the financier's share. With Principal and Rental, you also make payments that reduce the amount financed.
4. When all payments are made, the financier's ownership share passes to you.

Who pays rent to whom?

There are two separate rental arrangements.

Your finance payments don't depend on whether a tenant is paying you, so plan for empty periods and repairs.

What payment options are there for investors?

• Principal and Rental: you pay rental plus amounts that reduce what you've financed, so the financier's share gets smaller over time.
• Rental Only: you pay rental without reducing the amount financed. It's available for a limited period.
• Variable or fixed rental rate: the rental rate can be variable, or fixed for a period on selected Ijaar home finance.

What does it cost, and what about tax?

Budget for the same kinds of costs as any property purchase:

• purchasing costs, such as stamp duty, legal or conveyancing fees and government registration fees;
• fees for the finance, such as valuation, establishment and settlement fees, and a risk fee if it applies (on selected Ijaar home finance it's included within the amount financed, not added on top);
• conventional building insurance for the property;
• your own contribution towards the price.

We don't publish rates on this website. An accredited broker can give you current rental rates and help you compare the total cost, including fees.

Rental income from your tenant is generally taxable, and some property expenses may be deductible. How tax applies to your investment and to Islamic finance payments depends on your circumstances, so speak to your accountant or tax adviser. The ATO's guide to residential rental properties is a good starting point.

Who can apply?

• People 18 years and over who are Australian or New Zealand citizens or Australian permanent residents.
• Some temporary visa holders living in Australia, and some Australian and New Zealand citizens and Australian visa holders living overseas, on selected Ijaar home finance.
• Individuals, companies and trusts. Some options are for individuals only, and your broker will confirm.

We don't offer finance to non-residents. Foreign persons, including most temporary residents, usually need foreign investment (FIRB) approval, and foreign buyer rules apply. Every application is assessed against credit criteria.

What about commercial property or an SMSF?

Ijaar home finance is for residential property. For other investment property:

• Commercial property: our Islamic commercial finance is available on selected Ijaar finance for individuals, companies and trusts. Commercial purchases are considered by exception.
• Through your SMSF: Al-Mustaqbal SMSF finance helps self-managed super funds buy commercial property, using Diminishing Musharakah, a partnership in which the fund gradually buys out the financier's share. Neither Riyadh Financial Services nor brokers give SMSF advice. Speak to a licensed financial planner or an accountant licensed to give SMSF advice.

What are the pros and cons?

Possible pros

• A structure based on rental on a real asset, not riba.
• The same consumer protections as other regulated credit, including hardship help and free external complaints through AFCA.
• A choice of payment options and, on selected Ijaar home finance, a fixed rental rate for a period.

Possible cons

• Approval isn't certain: every application is assessed against credit criteria.
• A variable rental rate can change, and your payments continue when the property is empty.
• Fees and charges apply, so compare the total cost, not just the rate.

How do you get Islamic finance for an investment property, step by step?

1. Talk to a broker about your plans. If you don't have a broker, contact us and we can refer you to an accredited broker.
2. Get advice from your accountant on tax and on how you'll own the property, such as in your own name, a company or a trust.
3. Your broker collects your documents and lodges your application with the financier.
4. If your application meets the financier's criteria, it may issue a conditional approval.
5. The financier arranges a valuation and, if approved, issues your finance contracts.
6. Your solicitor or conveyancer coordinates settlement, and you're the registered owner on the title.

How can Riyadh Financial Services help?

Riyadh Financial Services arranges Shariah-compliant property finance through accredited mortgage brokers. Accredited brokers must act in your best interests under Australian credit law (the best interests duty), and they work across Australia, in person or online.

• Ijaar home finance for buying a residential investment property.
• Refinancing an existing investment property to Ijaar home finance.
• Islamic commercial finance, and Al-Mustaqbal SMSF finance for funds buying commercial property.

Our product structures are reviewed by our independent Shariah adviser. Ask us for the current Shariah certificate and what it covers. We explain how our structures work, but we don't give religious rulings, and you're always welcome to seek your own scholar's view.

Keep reading:Ijaar home finance · How Islamic home finance works · Is Islamic home finance more expensive?