collateral

[voodoo]

Hi

I am thinking of investing in a 1 bedroom beach bure in a 4 1/2 star resort for my next IP.

I had a brief discussion with my bank manager today and they say that they do not like to use the collateral from the bure for security in the loan, which will be IO.

I will have to use the equity from my other properties to secure this loan.

I will ask the bank this question later this week, but can anybody tell me why this would be?

Will this affect my borrowing capacity in the future, will I be able to draw from the equity of this property in years to come?

The property returning 20% gross and 7% net.

thankyou
I look forward to any replies

 

[Sunstone]

Dear Voodoo,

Banks are cautious at times for good reason.

In the case of a holiday unit I would recommend caution and even to find a different (more mainstream/less volatile) opportunity.

Why is the bank cautious?

-Are the rental income figures correct? (Volatile holiday figures means they are less accurate to predict. (As opposed to standard residential or commercial agreements.)
-Who would purchase the property should you default? (A niche market property such as this would not be sold to the owner occupier segment. Meaning that you have eliminated a large part of potential buyers.)
-During hard times which dwellings are vacant? High end luxury dwellings and holiday units.
-What is the financial backing of the resort operator?


Yes this will affect your purchasing capacity in the future. It all comes down to how your lender views the security. Higher risk is reflected in a lower LVR.

Other factors come down to the downsides that are inherent in single unit purchases. What development/value adding opportunities are there? How is the value of your unit affected by distressed sales of other units in the complex?

Some thoughts...........

Cheers,

Sunstone.

 

[Kristine..]

Hi Voodoo

This beach 'bure' sounds very exotic - pass the coconut milk and relax in your hammock while I deliver a mini lecture on securities!

If you were the lender, what type of security would you like to see against the money you are lending, particularly if it is not your money, but you are custodian or trustee of the money?

Property comes in all shapes and sizes, but when offered as collateral for a loan, not all property is suitable.

Property which forms part of a resort will have minimal resale value / limited market appeal (according to the lender) than, say, your principal place of residence. The resort will also have less importance to you, the borrower.

Which property would you work harder to keep? Would the 'bure' be a 'disposable' asset if things got crook in Tullarook? If you had trouble keeping up payments would you save the house or the bure?

So the lender may decide to limit the LVR on the bure to, say, 50%, or the lender may decide that it will not take a direct security on it at all, but you are welcome to buy it and they will lend you the money, but the security must come from a more realisable asset such as your residential property.

So who buys resort type property? Cashed up buyers is who. People who want to add something interesting into their investment mix. It's a bit like buying No Liability mining shares. Fun, perhaps profitable, and a bit more exciting and pioneering than just buying boring old Coles-Myer or BHP Billiton blue chips.

Voodoo, each lender has different lending criteria, decided upon by whoever does these things and set in stone for those actually doing the lending. The knack is in finding a lender who will accept your particular property as security, and at what LVR and at what interest rate. You may get a 70% LVR with a loaded rate to include a risk rating, but you may not get a 95% LVR with a home loan rate. Then again, you may only find a lender prepared to take 30% LVR with, say, a 5% above Standard Variable Rate risk rating, etc etc

Once you have owned it for a couple of years, you may find it can be included for collateral, but then again, you may not.

So, caveat emptor. If you think it is a 'good buy', then buy it but understand that you will need to factor all variables such as impact on your future borrowing capacity into your assessment of worthwhile investment, not just apparent immediate rental return.

Maybe you should go there for a week or two to think things over, nice and quietly!

Cheers

Kristine

PS There is a difference between 'capital' and 'collateral'. If you buy it it may be included in your 'capital' (balance sheet) but not as 'collateral', that is, security against borrowings.

 

[voodoo]

Sunstone and kristine

thanks for the reply it has given me more things to think about.

I have been thinking about this investment for about 6 months now. I have researched the resort and the operator, It is in my home town.

I have viewed the returns of 4 different bures for the past 12 months from 2 diffrent R/E's.

business is up 20% on last year,

What does concern me is the refurbishment every few years at the operators say and there is always a couple of bures on the market.

gee, this is a tough one but i think you are right, i might add it to my portfolio in a few more years.

thanks again,