Semi theoretical exercise

[Bobq]

Folks,

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!

Bob

 

[geoffw]

Bob,

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.

 

[Bobq]

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.

Bob

 

[bundy1964]

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 )

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.