Semi theoretical exercise


I'd like to float an idea for interest's sake and maybe a bit more. I have my eye on a commercial property in a high capital gains growth area, securely leased for the next 10 years. Only 2 problems:

1. They want too much - I wouldn't buy at the asking price but I reckon about $1.5 million would be fair.

2. As it's commercial, banks would indicatively lend around 2/3 of the value of the property and I don't have the remaining $500K.

Here's my basic plan. I set up a unit trust with a shelf company trustee. The unit trust has entities (companies, trusts or people) as its beneficiaries and has 10 'shares' or units. For each unit, $50,000 is lent to the trust so that a fund of $500k is there to buy the property. Each unit gets 10% of the income after interest and costs. Returns would be on the order of 3-4K per annum before tax. Once the property goes up 50% in capital value, we refinance and pay back everyone's $50K.

I'd appreciate either interest or feedback. Is there a better way to structure this? What would interest you? Is this proposal a total dog?

Let me hear what you think!


Something else to consider is that you might not be able to get an interest only loan. The last time I investigated, the bank were only lending to 70%- and I had a 10 year period to repay the loan- making capital repayments larger than the interest, which put a real dampener on it.

Good luck with it.
Thanks for that, Geoff.

I think I can get interest only finance, and possibly to 70% (but I'm assuming 2/3s only).

There was a mistake in my previous posting, however - the return per unit should be on the order of $7500 per unit before refinancing (ie. around 15% return plus capital gains]. After refinancing it goes down, obviously, but then you're getting your money from an effectively zero investment.

There are non bank lenders out there that will do interest only loans for 80% up to 110%

My loan is interest only for 2 years with the option of repaying some off at the end of the term, rolling over for another 2 years interest only or changing to a 15 year p & i loan. Since the p & i repayments are at a higher interest rate I will go the io route with repaying lump sums every 2 years ( I know it's not the Kevin Young way of doing things but I am comfortable with it and that is what counts :D )

They will also use existing capital in your ppr to help get you over the line, it is more risky though! I could of financed total cost using my existing ip with 10k cash out making a $5 a month cash loss for the first year.