Which option would you choose and why ?

[investor]

Hi all

Consider 2 finance options.

Commercial shop purchase. Purchased for 1.5Mil and to be used as an owner occupier so NO RENT and for the LONG TERM.



OPTION 1

Major Bank

- wants 25% deposit NOW then 5% to be paid over 2 years so total 30% deposit
- interest rate 6.65%
-$1000 application/valuation fee



OPTION 2

Relatively small boutique leasing company that is now offering property loans.

- wants 0% deposit now so 100% loan but wants 10% to be paid over 5 years. So total deposit after 5 years is 10%
-interest rate 7.95%
-$2450 application/valuation fee

Provided you have all necessary deposits and stamp duty which option would you take and why ?

Regards
Investor

 

[Bill.L]

Hi investor,

Can you get a risk free return of 11%+ on the $450,000 deposit??

Just on a quick look at the numbers

100% lend @ 7.95% = $119,250 p.a.

70% lend @ 6.65% = $69,825 p.a.

The 30% = $450,000. The difference between the 2 is an annual payment of $49,425 therefore you would have to make about 11% risk free to break even.

Without go into the numbers in greater detail (remembering you have to discount future cashflows etc) it is a no brainer for me if I had the deposit money.

Of course if I was you I would go into the numbers in much greater detail (and if I was me I would definately go into the details with a fine tooth comb )

bye

 

[APerry]

Investor,

When comparing commercial loans you should always take into account other expenses, such as line fees and, if it is a commercial bill, rollover fees. Your deal sounds like it comes from CBA, who generally have these fees, which can substantially increase the real cost of the loan.

Regards
Alistair Perry

 

[investor]

Investor,

When comparing commercial loans you should always take into account other expenses, such as line fees and, if it is a commercial bill, rollover fees. Your deal sounds like it comes from CBA, who generally have these fees, which can substantially increase the real cost of the loan.

Regards
Alistair Perry

Alistair

1% line fee is included in the interest rate.

Also now the bank is offering a 25% deposit only instead of 30%.


Bill L

I never thought of it that way.

The way I see it is any money you give away as a deposit is money you will never see again or be able to use again. However at what cost.

If you take option 2 you will have 450K to use as deposit for more property even PPOR which is not deductible, however that luxury will cost you around 20K per year in increased interest.

Ahhh the decisions we have to make

Regards
Investor

 

[Jamie]

The way I see it is any money you give away as a deposit is money you will never see again or be able to use again. However at what cost.

Hi vesta,

How is the deposit money given away so that you can never use it again? You still have it - its just equity in the property, rather than cash in the bank. When the property increases in value, you can draw it back out, and if you sold the property it would still be there for you to use.

Its the increased interest in Option 2 thats just "given away" - in Option 1, your deposit is actually preserved as equity in the property.

Jamie

 

[investor]

Hi vesta,

How is the deposit money given away so that you can never use it again? You still have it - its just equity in the property, rather than cash in the bank. When the property increases in value, you can draw it back out, and if you sold the property it would still be there for you to use.

Jamie

Hi Jamie

Well it's not exactly the same, I'll explain

If I give 450K (30%) deposit and the prop increases to 2Mil over a period of time I can draw out 70% of 500K which is 350K

If I don't give any deposit and the property increases to 2Mil over the same period of time I can still draw out the full 500K and so now I will have 950K to play with instead of 350K

That's the difference, but I can understand having the the 450K in the loan as equity but it's equity you will never have access to.

Regards
Investor