Finance – Making or breaking your next deal

Finance is Key

Finance is a key factor when obtaining an investment property. As an investor, you need to have the necessary information and understand all the available options to make successful decisions that suit your next purchase.

Financers don’t always understand property investing that doesn’t conform to the ‘norm.’ That’s why it’s important for you to know about all the new options available in the finance industry. Thinking outside the box could significantly impact the cash flow of your investment and determine whether you can even obtain the loan.

Since structuring your finance properly can make or break your next deal, here are a few options to consider:

Joint Ventures

Joint ventures can allow you to accelerate the growth of your property portfolio even when you have little or no more equity to use as deposits to buy property.  There’s nothing worse to an investor than finding a great deal or wanting to purchase more properties without the means to do it. If you keep running out of equity, even though you have great borrowing capacity, this strategy may be for you.

Joint ventures can be a good way to fast-track your portfolio but it’s important to choose the right partner. “Joint venture partnerships should have a common purpose, complimentary skills, and an asset base from both sides that can contribute to the project,” explains Todd O’Neill, whose career in banking and finance spans 20 years. He currently operates a business finance company, The Mardent Group, with Damian Mantini.

Joint ventures are successful when the partners have done their homework on each other and have written agreements that spell out the conditions of the partnership.

Low Doc (or Lo Doc) Loans or Lines of Credit

If you are self-employed or an independent contractor with no proof of income or a property investor that has been rejected by traditional lenders you might want to consider low doc lending. Changes in financial trends are adding to the demand for non-conforming products, such as low doc loans, which require less “documentation” than traditional loans.

These loans predominantly for clients who have difficulty documenting their finances with regular pay slips, tax returns or business financials. For example, while the self-employed often can’t satisfy traditional lending criteria, they can be perfectly capable of serving a loan.

Keep in mind, low doc home loans are usually more expensive than traditional loans due to the higher level of risk. In addition, “requirements are more stringent than in the past,” warns Mantini. An investor must demonstrate the ability to repay the loan.

Commercial Finance

Commercial property offers a wide range of exciting investment opportunities. While purchasing commercial properties, retail shops, industrial land, or offices have a higher risk; returns are often higher as well. A well-researched commercial property investment can be very lucrative and require little attention once it’s tenanted.

Commercial property finance is typically more complex than residential funding. A qualified broker can help you understand all your options and determine which loan structure is right for your needs. Normally banks will lend up to 75% of the value of the property.

Cross-Collateralization

Cross collateralization occurs when more than one property is used to secure a loan or multiple loans. It is a creative financing technique that has been used for years in commercial real estate and is currently being used by some forward-thinking property investors.

For example, if you own one property and want to purchase another without using your own funds, the bank can use both properties as collateral for the new loan. However, be aware that cross collateralization gives banks greater control over the properties and this strategy has the potential to negatively impact future investment opportunities.

These are just a few of the innovative options available in the finance industry. As useful as traditional financing strategies can be in acquiring property, don’t overlook the other options of finance that can unlock doors to wealth and prosperity.

Recent Successful Case Studies:

Tracy Kearey from the Mardent Group has given us two recent case studies which show how a broker can help their client overcome obstacles that are stopping them getting finance.

Case Study 1:

Client purchased the property 2 years prior with vendor finance. The terms were for 2 years with the client making I/O repayments. Time was up!

Obstacles:

1. Client’s bank would not refinance the vendor finance
2. Client wanted to use a current valuation not the contract as she had renovated the property and wanted pull out the equity for another venture.

Solution:

I called my lenders and established that as she had repayment history on the current facility and we were looking at an 80% LVR the application would be considered.
The application was submitted and within 1 month the application was settled client had a lower repayment and funds to move onto the next venture!

Result:

Happy Client!

Scenario 2:

A self employed couple (61yo and 55yo) approached one of our brokers in order to purchase a commercial security in the name of their self managed super fund.  The purchase price of the security was $800,000 with an expected rental return of $110,000 per annum.  The loan they were seeking to complete the purchase was $500,000.  The security on offer, their unencumbered owner occupied property.  The broker shopped the loan to a couple of the major Banks and was told no it doesn’t fit their lending criteria

Obstacles:

• The borrowers business strategy was to purchase ailing “Tint-a-Car” franchises and build them up in to profitable going concerns.  In early 2009 they sold their previous “Tint-a-Car” franchise’s for a considerable profit and purchased two new franchises.  2010 financial year was spent building up the new franchises therefore all monies earnt were put back into the operations and the business traded at a small loss.  The borrowers opted to draw from the profits of the sale rather than take a salary from the business, therefore the borrowers income was $Nil for the 2010 tax year.  In 2011 all there planning and hard work paid off with a substantial profit earnt plus directors salaries paid.
• As the borrowers were nearing retirement age and the security being used was their owner occupied property, responsible lending concerns needed to be addressed.
• As the property being purchased was in the SMSF rental income could not be included in servicing.
• Average of the two financial years was not adequate to service the debt.

Solution:

• We obtained the borrowers 2012 interim figures and BAS to March 2012 (including tax portal lodgement evidence). The figures shown in the interims and BAS exceeded the 2011 tax year.  Which meant that based on the 2011 figures supported by the current trade servicing was evident on trading income alone.
• The value of the commercial premises being purchased exceeded the proposed funding by $300,000 plus the value of their current franchises provided us with an equitable exit strategy which meant we were able to write the loan over 30 years rather than reducing the loan term to years to retirement.
• The borrowers entered into a loan agreement with the superannuation fund where the superfund were to pay a regular monthly payment to the borrowers.  Formal evidence of the arrangement was provided.  The repayment was adequate to cover the monthly commitment for the proposed funding.  Whilst we did not use this income in servicing it supported the proposal put forward to our funder.
• The loan application was received by our office on 8 May 2012 and settled just 18 working day later on 31 May 2012 at a residential Profession All in One Line of Credit rate.

Result :

Happy Clients

If you’d like to get in contact with a finance broker to see how they can help you we have some great finance brokers based around the country go to Property Women’s Property Professional Network to find out more.