Forum Replies Created
Which State?
Hi Wilko, I'd be happy to go over this or future ones with you. In terms of what they don't tell you, it gets worse, some apply a discount to the end value abndlend against the discounted figure, so 60% of value can be more than 70% of value, depending on how it is determined. The same with loan costs, some loans include a rate on the undrawn portion of the loan limit, so you can have a case where 10% is cheaper than 6%. What makes matters worse is most people go into a bank branch and ask questions, but a high proportion of business bankers have very little experience or knowledge of development funding, so there are cases where you can be declined by a bank, go back through another channel and get an approval relatively easily.
Give them hell about the cricket while your over there Richard!
If servicing is available without rents then you should be able to get up to 70% of the end value, but don't discount this as an issue as while the reality is you would be able to service the loan, bank calculators can make a good situation look very poor after they hit you with a short ammortisation period and high interest rate in their servicing calculations. You are unlikely to get this without the GST being discounted, but you can probably get it reduced so its not 10% of the total end price, its a negotiation process with the assessor so there isn't a firm answer that I could give on this. By debt clearance I mean pre-sales. If you have adjoining walls then forget about funding them individually, you probably wouldn't have been able to anyway as generally you need slabs down before you can get the subdivision through. After reading all of your comments, I think you should be able to get this deal funded, but very few commercial construction loans go through easily these days, so be ready to push your case strongly.
Hi Wilko,
If you are not able to separate titles pre-construction, which would be unlikely in Victoria (I can't comment interstate) then the loan will have to be commercial and servicing would be constructed under commercial policy which means you would have to be able to service the end debt without using prospective rent. The lender would still fund net of GST because you would have to pay it if forced to sell. It's very difficult to qualify for a commercial construction loan without debt clearance. You can probably do it through a private lender but you could end up paying as much as 13% interest and upfront fees pushing 3% before disbursements such as legals and valuation.
I realise I'm not painting a rosy picture, but this is the reality of the current market for construction finance, its not easy.
You're going to struggle to get the amount you are after Wilko. The banks all max out at between 65% and 70% of the end value net of GST. Your income is not relevant to this, although it will probably mean you have a lower presale requirement. There aren't too many lenders around doing higher LVR's on development finance at the moment, although if your asset position is Ok outside of this project you may be able to attract a mezzanine funder to make up the difference, this is very expensive though.
Thanks for recommending me Richard. Hari, I'd be more than happy to have a chat with you about what you are after.
bullet46 wrote:Hi Guys,Recently I sparked an interest for commercial real estate and I am wondering what some of the negatives are?
I can see online that the rental yields can be quite good, but something tells me I'm missing some important points. A few things that crossed my mind that I could be totally wrong are:
- Finance may not be as easily attained on commercial?
- Commercial real estate may sit empty for longer while waiting for a tenant?
- Capital growth as strong?
- Capital outlay greater than residential?
- Higher insurance?
These are just some possibilities creeping in my mind and I'd love to be wrong about them all.
Jamie
Hi Jamie,
You can't really pigeon hole commercial property under one banner. Everything you have listed may be true for some properties but not for others e.g.
1. Finance – it easier to finance some commercial properties than it is residential, you don't even always have to guarantee commercial loans.
2. Leases are generally much longer than for resi properties and, depending on the type of property, demand can be extremely high (how many vacant supermarket buildings have you seen?)
3. Growth is based far more on commercial factors than are resi prices. If you have a long lease with increasing rent built in you will most likely have steady capital growth. High leasing demand has a greater impact on price than it does with resi property. You shouldn't assume growth will be lower, its not always the case.
4. You do need more capital. To buy quality you generally need a lot more because not only are possible LVR's lower, but better quality properties are generally quite expensive.
5. Tenants usually pay outgoings, so things like insurance, land tax etc don't come from your own pocket.
I hope these comments are of assistance.
Richard hit the nail on the head. Whatever you do don't let them pay down the IP loan even if it means giving them cash security.
Thanks for the comments Will. The developments we have financed are already pre-sold, that hasn't been a problem. I'm pretty concerned about the settlement risk on these projects though as the sales prices, while currently supported by the market, are very high. Hopefuly the activity you mention helps keep prices high for a little while. Don't worry about my sob story, I'm still going to do OK in that project.
Hi Will,
How is the market in Port Headland at the moment? I have a few clients developing land up there and it seems it is doing a lot better than some other areas in the North West. I, unfortunately, have just finished building he in Karratha and it seems I will get around $200k less for it than i would have 6 months ago.
Regards
Ozman,
If all you are interested in is the interest rate on your loan UBank are probably the cheapest at 4.62%, you have to go direct with them, it will be very much a no frills product and i'm not sure if there are any upfront fees. The lowest carded rate that I know i can write, from the top of my head, is Mac Bank 4.84%, there are some bells and whistles available with this product and we do use it fairly often. Most of the majors will price match and if the loan is large and low LVR you would probably be able to beat this rate. The problem with rate shopping is that the lowest rate might not be the type of loan that suits your circumstances the best and having a sub optimum loan structure can very easily cost you a lot more money than can be made up by a slightly discounted interest rate.
The answer to both questions is "yes", do you have a PPOR as well though? To maximise the tax efficiency of your structure you need to address all debt, debt payments and income flows, but you are on the right track.
Ozman wrote:Alister I agree that on the face of the information supplied they are not in a very strong bargaining position. They are certainly not in the Premier banking customer category andthe deal they can cut will depend who they bank with in this case. In the present financial climate first time buyers need to be looking at their figures very closely and factoring in higher interest rates with a plan on how they will manage same. Having bought my first in the days of 15%, I have always been able to negotiate with the finance provider for a good deal.Back around the early to mid 80s I can remember buying bank bills with a 20% return, lets hope we don't end up back there as inflation on that scale destroys many struggling investors.
As a matter of interest, in the present climate, how many percentage points below the standard variable rate would your best final rate to the borrower be. (Best Case Scenario)
It's not like the old days when everyone's standard variable rate was the same. A bigger discount doesn't necessarily mean a lower rate any more. It also depends on what else is being offered in the market at the time, as none of them like being beaten for good business. I know this answer seems evasive, but truly the only real answer is that it depends on both the loan scenario and the timing.
Sorry Ozman, but it doesn't work like that. If there is no broker there are branch and related costs. Broker commission is not a direct added expense, there is no lender that will discount the potential brokers commission just because there isn't a broker involved. I'd be pretty surprised if any individual could negotiate a better rate than a good broker, but in the case above the loan amount won't be sufficient to get a negotiated discount anyway.
Hi BertieB,
I'd be interested to know what you think the job of a broker entails?
I'm not aware of them not disclosing commissions and I don't know how much they charge. It is ridiculous to suggest that anyone buying through Blue Wealth, or any similar company for that matter, would not know that the company is receiving a commission. As for PIPA, who are they? I've never heard of them, I've never heard of Ben Kingsley and, while I have heard of Margaret Lomas, I'm not particularly interested in her opinions.
Rezoning land can take a very long time, don't be so sure that nothing has happened. I'll caveat my opinion with the fact that I haven't done much research on the company or property, other than to check and see if there is any likelihood of rezoning. It appears likely the land will be rezoned, although there can be no guarantees. I don't like that it took so much digging in the huge amount of advertising material to get the address of the property and I think the developer is a long way ahead of themselves showing potential block configurations and even more ahead of themselves showing potential buildings, this is just emotive advertising. My prediction is that the company promoting this will make a lot of money whether the project goes ahead or not and the investors will probably make money, but not as much as they should for the risk taken. You can't point the finger at the developer for trying to de-risk their project, investing is all about getting the risk:return ratio in your favour, it seems to me in this situation it favours the developer a lot more than the potential investors.
I know Tony Hayak, the owner, personally. Tony puts a lot of work into both where they buy and the developers they deal with. They get well paid for sales, but as a developer you can't buy Tony just with high commissions, I know this because my main business is financing property developers and i can't get Tony to do my clients pre-sales because the stock is all in Melbourne and he doesn't like Melbourne at the moment (I don't agree with him on this, but that is beside the point, time will tell who is correct). For someone interested in off the plan purchases, I would suggest that Blue Wealth is about as good a company as you could deal with.
I had a good look at this site. The info provided makes it quite difficult to accurately identify the land but there is an address on the sample plan of subdivision and it appears this land is in an Urban Growth Zone, which the developer should advertise upfront. What they can do with the site depends on the Precinct Structure Plan, what it appears is being prepared at the moment. There is vacant Res 1 land nearby, by the look of the photos, so you can probably get an accurate valuation on this land if you do a bit of digging as an englobo lot as well as on the basis of per residential lot. My suggestion is that if you multiply the $40K by the number of proposed lots, the figure will far exceed the current value of the land, but that is just a guess.
