Commercial Property as Security

[joyoboyo]

Hi Guys

First time poster here. I am hoping there may be some good advice out there from forum member or at least some comments that may give me more 'food for thought'. Figures below to give you an idea of what I am trying to acheive

I own a commercial property (office) returning around 8% per annum, positively geared. There is around $260k or thereabouts equity in the property, $160k owed - 12 years left on loan.

I also have around $140k in cash in bank and annual income is approx $200k per annum.

I have the opportunity to buy a residential property that will be a private sale and what i believe will be at a discount to the market. Purchase price of property approx $1 million - $1,100,000, market value around $1,250,000. So there is around $100k in the deal just for buying. Rental income would be around $4000 per month. The house also has renovation potential an sits on a 1000sq metre block

What I am trying to work out is whether keeping the commercial property is worth it given the lending requirements of the banks for commercial is different to residential or whether any financial institutions will put a loan together to cover both properties over 25/30 years.

In terms of borrowing capacity I tick a lot of the boxes, if the office was sold I have access to $1,300,000, however if i keep the office the banks will only lend potentially to $1 MIL which I don't understand. The loan on the commercial property is seen as a negative to some brokers and lenders as the money borrowed for this office affects my lending capacity and I am not sure if I am getting the right advice. I see the commercial property as an excellent investment, it returns positive income each month and i have over 60% equity in the property.

So the questions are:

1. What would be a suitable strategy in terms of loan for the two properties; assuming I want to keep the office and buy the house
2. IS it worth considering selling the office with tenant as a 8% return to the new owner, and liquidate the equity to combine with the $140k in cash and have one residential loan for a lesser amount
3. Are there any forward thinking lending institutions that would view the two properties as a good risk
4. Are there any investors out there that have experienced similar

NOte. the residential home may be rented out or i may live it it. Currently renting myself.

Hope this makes sense. If anyone wishes to table any ideas or suggestions they would be very much appreciated.

Thanks
Johnno

 

[RPI]

Hi and Welcome,

If you think that the office property will keep being reasonably easy to tenant, then it only going to become more positive in the future, and in 12 years you are looking at it providing a chunk of income. Alternatively you could look at refinancing the property to interest only.

Don't forget CGT and commission on the way out and stamp duty and other costs on any replacement property.

Some great brokers on here, they will help

regards

 

[Rolf Latham]

Hi Johnno

Lots of permutations and variations here.

It may really serve you to sit with a decent broker that can cover both resi and commercial

Few initial comments on the limited data available

1. The CIP looks like its worth 400k. Maxish lvr for a normal lend is 70 %( though higher is poss) . That means you could access an equity loan of around 130 000 for part deposit and costs for your resi place

2. say you need 1100 to buy the new place. Assume we could qualify you for a 90 % lend, then youd need 110 k for the deposit,and say 50 k in stamps costs etc. between the equity loan and your cash youd have 110 k left over

3. In theory you have enough for an 80 % lend on the new resi at 1100 k buy price, but on the surface, id say thats risky business and you are better to borrow 85 to 90 % pay the lmi premium and hold back a good cash buffer.

4. The comm lend will generally only go to t to15 years, though some term loan based lenders will go longer

5. The Resi loan should be able to go 25 to 30 subject to age and income considerations.

6. Usually notmuch benefit in combining the loans and crossing the securities, quite the opposite most times

there is a deal there but you could consider structuring differerntly than you have done so far

t
rolf

 

[DaveM]

With an income of 200k and a sizeable asset to leverage, you may consider paying for specialist advise that is structured to your specific needs. You dont want to do things in a way that causes issues down the track re development of the property you purchase.

 

[RPI]

With an income of 200k and a sizeable asset to leverage, you may consider paying for specialist advise that is structured to your specific needs. You dont want to do things in a way that causes issues down the track re development of the property you purchase.

Agreed, I would be doing an examination of my whole structure and putting together a plan of how to structure everything moving forward, the ability to utilise SMSF's etc.

 

[Terry_w]

It is possible to sell a commercial property you own to a SMSF. It may even be possible to avoid stamp duty too.

This may free up some cash which you could use and also get to 'keep' the property.

 

[Aaron_C]

Key for you is to get the cashout on the comm property and put that towards the new purchase rather than tying them together.

 

[joyoboyo]

Thanks Guys for your initial feedback.

I agree that accessing the equity in the CP is the way forward. To this end I have researched a number of products and believe given the positive cashflow on the property that a commercial lease doc loan over 20 years will not only release the cash I need but will continue to return a positive yield over the extended term.

My only concern is that I will be borrowing more (refinancing the CP), and worry that this will then affect my borrowing capacity for the residential property, especially in the case of trying to borrow 90% of the property purchase price. Any thoughts on this?

My figures (loosely) if I tried for a refinance of the CP as above are as follows

Refinance office: Borrow 80% of $400k = $320k over 20 years @ (hoping for interest rate of 6.2% ish, that is what I currently pay on current business loan of $160k)

Repayments of $1850 per month - returning $2500 per month (should qualify for commercial lease doc loan based on these figures)

Release equity of approximately $160k from office. Add that to cash of $130 - $140k at bank gives $290 - $300k for residential property

Borrow 90% of residential property value (assuming $1.1 MIL) = $990000
Means about $110 deposit plus $50 buying costs = $160 k spent
Leaves $140k to use for developing the residential property if needed.

total borrowing would be approximately $320k + $990000 = $1.22 MILLION

Based on my salary of approx $200k and my wife $50k per annum the borrowing calculators suggest this is feasible. However, my concern is whether the increased borrowing on the office will affect the subsequent borrowing on the RP.

Ideally, i think i need a broker and lender who is across both transactions in some way so the first one doesn't cancel out the second in any way.

My figures are loose to say the least and I would appreciate any cooment on what the costs for refinancing are. Additionally, I run my business through an discretionary trust and wonder if putting the office under the trust is a good idea and presume stamp duty would be paid if the trust in effect buys the CP from me.

Plenty of permutations to go through. If there is a broker in Sydney who thinks this is something they understand and could get across the line then PM me by all means so we can sit down and work through the figures. I am not generally a timewaster and would hope a successful deal on this borrowing would be good business for a suitable broker.

Appreciate any further thoughts and ideas from the community

Johnno

 

[Terry_w]

Additionally, I run my business through an discretionary trust and wonder if putting the office under the trust is a good idea and presume stamp duty would be paid if the trust in effect buys the CP from me.

Hope you have a tight trust deed and a company as trustee with 1 director. It would generally be very risky to buy any assets in a trading trust - seek advice.