What to do with $1mil?

[lizzie]

Don't want to highjack Jingo's informative thread - but the figures and info has really made me start thinking. Rather seriously.

With what is going on recently we've had a real attitude adjustment to a lot of things in life ... so I want to ask some questions.

If/when ppor sells and if/when hubby gets package payout, we'll have around $1mil (prob just over) in cash. After always owning a ppor we've decided that it's okay to rent for a while until we get sorted with work, location, right property etc. We'll still hold the IP's as they are neutral atm and would only yield another $100,000 in equity, so not worth hassling.

That being said ... Jingo's figures on a comm property leads me to think that we might be able to buy a comm at around $3mil, with $1mil for costs and deposit ... and that if it's returning around 9-10% ... and if borrowing was at around 7% ... the difference between rent and interest repayments is around $150,000/yr ... bit of a mind shift happening as that's our current gross income.

1. What would the expected principle repayments be on P&I commercial loan of $2mil as I can find info on the bank sites for "business loans" but not for business property investment loans.

2. Would we need an alternative income to qualify for borrowing? ie, send the wife out to work in the salt mines if hubby unable to procure anything immediately.

3. Anything else anyone can think of

Thanks in advance.

 

[Aaron_C]

1. What would the expected principle repayments be on P&I commercial loan of $2mil as I can find info on the bank sites for "business loans" but not for business property investment loans.

2. Would we need an alternative income to qualify for borrowing? ie, send the wife out to work in the salt mines if hubby unable to procure anything immediately.

3. Anything else anyone can think of

Thanks in advance.

1. For a $2m, 15 year loan @ 7.5% pa, minimum monthly payments for a P&I Loan are $18,540. It's the same formula as a normal residential mortgage, just with a shorter duration. You can get longer loan terms but 15 years is standard.

2. Commercial loans are very different to residential. Most of the big lenders have something called an 'annual review'. This means that, each year, the lender will review your property to make sure that the tenant is still there. If the tenant has left, this constitutes a breach of your loan and the bank can therefore call it in (which is bad). There are, however, lenders who don't have this annual review clause.

Servicing rate for commercial is different for normal residential as well but it's not that different. Plus with commercial lending, the bank can take into account any budget forecasts/estimates/management figures that you have when considering whether to give you the loan. It is not cookie-cutter like a standard residential loan.

3. I think I've summed it all up above.

 

[lizzie]

So, that would still yield income of around $80,000 - or net $1200/wk after tax. Still interesting - but that principal repayment and extra .5% takes a big chunk out the rental income (over half).

Would want to factor in some capital growth there too ... al la Dazz.

Would 7.5% be standard at a 67% lend or is it negotiable down to 7%? I guess anything is negotiable.

 

[Aaron_C]

Don't forget the figure I quoted is Principal & Interest. Interest-only would be $12,500 per month so a $6,000 saving.

Commercial lending is based on 3 month bank bills (BBSW), which right now is ~4.25%. If you are a good client you might get 2.5-3% margin over bank bills, it's all negotiable, based on LVRs, your cashflows, the security itself etc. It's hard to knuckle down an exact rate, which why I said 7.5%.

 

[MichaelW]

Buy the banks. They're yielding 10% odd franked at the moment aren't they, with definate growth upside potential too...

Your head is where mines at right now too. Will be interested in the outcome of this discussion. After ammassing a certain amount of net worth in resi property, I'm going to start thinking about how to turn that into a more efficient income stream. Shares, commercial? Yep, that's where my head is at.

Cheers,
Michael

 

[lizzie]

Buy the banks. They're yielding 10% odd franked at the moment aren't they, with definate growth upside potential too...

Your head is where mines at right now too.

Yes - did consider that too.

$100,000/yr income would be darn great ... could rent for a while to build up substaintial deposit for lifestyle ppor, or additional ips, or more shares - and have more in-the-pocket money than we currently have.

 

[locko24]

Don't Telstra shares yield around 12% after taking tax credits into consideration? I guess you'd need to be on the highest tax rate to take advantage, which in most peoples' case would mean a job!

Interesting conundrum !

 

[Aaron_C]

Don't Telstra shares yield around 12% after taking tax credits into consideration? I guess you'd need to be on the highest tax rate to take advantage, which in most peoples' case would mean a job!

Interesting conundrum !

Not really. The people who benefit most from franked dividends are those on a low-income tax bracket because you can get a tax refund from the ATO.

 

[lizzie]

Don't Telstra shares yield around 12% after taking tax credits into consideration? I guess you'd need to be on the highest tax rate to take advantage, which in most peoples' case would mean a job!

Interesting conundrum !

Not much CG on Telstra tho ... banks safer.

Would pay around $25k in tax on $100k ... so refund of around $5k/yr ... if no other income.

 

[locko24]

Not really. The people who benefit most from franked dividends are those on a low-income tax bracket because you can get a tax refund from the ATO.

Interesting.
Obviously not my area of expertise

 

[Player]

Lizzie, be mindful of income coverage of the asset also.

Dazz has a very informative post here:

http://www.somersoft.com/forums/showpost.php?p=846367&postcount=10

Personally (and we are all different), I would leave some powder dry out of the deal and go for a smaller asset. You need buffers. I would also be stress testing interest rates at higher than circa 7 %.

Your numbers need to add up and no doubt the MB's can elaborate on that also. It is a different lending game as Dazzs's excellent post points out.

I am also looking where we are now. Brissy and the decent peripheral biz parks and enterprise precincts along the M.1. from Gold Coast thru to metro Brisabane. Plenty of vacant assets trying to sell and plenty of lease backs also. Be wary of the latter that the rent isn't too high (at outset) to cap the purchase price up so the vendor (your tenant) doesn't get too high a sale price (and you pay too much).

I have come across quite a number of these and selling rea's will play dumb pretending to not understand the formula and the cap rate games they are trying on for the seller. This can be overcome by ratchet clauses for rent review time (if agreed by seller/tenant) and if the jurisdicttion allows. You cannot use ratchets with many retail properties in most states for properties under a certain size.

Be sure to research current lease rates per sq m to ascertain if tenant is paaying on the money; too much; or, too little. Best the latter for market review time. Rents can increase and by (cap rate/yield) implication value of the asset also goes up.

Best of luck.

 

[lizzie]

Actually ... very interesting exercise ...

Better off income splitting 50/50 ... but we all knew that. Means a difference of $8k in tax on $100k ... then have to factor in renting costs of, say, $500/wk ... gives disposable leftovers of around $57k/yr after tax and rent ... but rent would increase annually and would have electricity/water etc bills.

But if bought a small acerage and build a self-sustainable house for around $500k ... income split the remaining dividends on $500k ... would have disposible leftovers of around $43k/yr but no bills except rates ... and be eligible for Part B .

And then, can galivant around the world a la Kathrynd and AlmostBob, housesitting our way around Europe ...

And then, when hubby's super kicks in in around 3.5 years, income more than doubles and the tax rate drops ... ... ahhh, the advantages of marrying someone born 6 days before the 55yr old cutoff ...

Must discuss further

 

[lizzie]

Dazz has a very informative post here:

http://www.somersoft.com/forums/showpost.php?p=846367&postcount=10

Thanks player ... I have read and digested all Dazz's threads over the years, which motivates me - but then I get cold feet.

I guess, at the end of the day, it comes down to use this opportunity of lifestyle now or wealth build now ... and how much wealth do we really need/want to achieve the lifestyle.

 

[MichaelW]

Lizzie,

My current plan is very simple. I just want to finish my Mona Vale multi-unit build and rent them out neutrally geared. Sell North Narrabeen and bring that cash North to finish my Bardon PPOR build and have some cash left over. I'll then be similar to you, paid off PPOR and a few neutrally geared IPs.

But I plan on then just using my salaried income to build a nice big offset account and further improve my cashflow. Rents go up, mortgage interest goes down and the exponential curve accelerates for my net cash flow position. Our household income is very strong so we can stash a lot of cash pretty easily, particularly with a paid off PPOR.

In time I'll think about cashflow investment options such as high yielding shares. But even if I did nothing I could retire on my resi investments in time as I'm only 40 at the moment.

I keep thinking back to KiethJ's great thread where he explains how he took his resi profits out via LOC and bought the banks when they were yielding more than their loan rates. They doubled from there and he retired comfortably. Banks are yielding more than their resi LOC loan rates today so it makes you start to think about it...

Cheers,
Michael

 

[JWR]

Hi Lizzie,

Sorry if I am out of place being so new but I hope I can help.

Although I am sure yourself and others would consider you an expert in the residential game, I am just as sure yourself and others would not consider you to be an expert in the commercial game.

This is Dazz's specialty - which is why he makes a lot of money in this field.

He may not think it is risky putting all his cash into 1 comm deal (so long as its a fantastic return). You and many other residential experts may though (how many people built their wealth on 1 residential property alone?)

Obviously if the right deal comes along it may be worth it - but I wouldn't put all my eggs in this one basket since you aren't experienced enough yet.

One day you may become like Dazz in the commercial game.

But until then only put a set % of your money there.

BTW - nice house you are selling - is it near Tinkler's?

 

[Aaron_C]

Diversification at such a low value in CIP is suicide...you will get crap tenants who will leave after 3 years after enticing them with 6 months rent-free periods...forget it.

 

[JWR]

So would you advise putting all your money into one deal with no experience?

I was thinking perhaps a cafe at the bottom of an office tower or something along those lines where there would always be demand since it is close to a successful larger commercial property. Not sure about costings but you get the point.

 

[Aaron_C]

So would you advise putting all your money into one deal with no experience?

I was thinking perhaps a cafe at the bottom of an office tower or something along those lines where there would always be demand since it is close to a successful larger commercial property. Not sure about costings but you get the point.

No. I suggest looking at many, many CIPs first, analysing leases, understanding the Retail Leases Act, checking the tenant/s financials, literally sitting in front of the shop during the morning, afternoon and evening to see how many customers they get, asking agents for the market rate for rental, getting comparable sales etc etc. You never ever go in blind. It's best to take your time and get the 1 purchase right than wasting your time with small little shops that aren't worth your while. Especially in this crap recession around the corner...

 

[lizzie]

One day you may become like Dazz in the commercial game.

But until then only put a set % of your money there.

BTW - nice house you are selling - is it near Tinkler's?

You're not out of line at all - which is why I keep getting cold feet. I would love to know Dazz better and be taken on as a mentee ... but I would never ask that of him as it would set a precedent and be unfair.

The off grid, eco house on a few acres in NZ is looking nice today - but tomorrow that could all change.

Michael - you have 10 years on hubby, which hopefully will make all the difference for you. After going thru a couple of divorces (one each) about 13 years ago, that set both of us back to square one. A few silly investments - asides a few real beauty good ones - also cost us. It would have been fantastic if they'd all be beauties - but a great learning curve.

 

[JWR]

Aaron,

Of course you would do your due dilligence before purchasing. After conducting this though, would you still put all your money into one deal if you had no experience (but an amazing opportunity)? I wouldn't.

I used to invest in shares (which is how I made enough for a few deposits) and I would only ever risk 50% of my money on one company (no matter how good it was). Luckily when I found one company I liked (MCE) I put half my money in it at less than $3 and sold all between $8-10 in the space of under a year. But now that company trades at $3 or so - so if I put all my money in and didn't sell I would have no property at all now.