Cashed Up with Commercial Property by Helen Tarrant

Author:Helen Tarrant [Tarrant, Helen]
Language: eng
Format: epub
ISBN: 9781119910350
Publisher: Wiley
Published: 2022-10-03T00:00:00+00:00

LEASE DOC LOANS

When I say that if you have a deposit, they will give you a loan, this is because most of the time the loan is based on the lease. This is what we call a lease doc loan. Your lending institution will only look at the lease, tenant, location and rental income for servicing the loan, so they do not look at your servicing. This is the best type of loan if you are serviceability tapped out and have a lot of residential properties.

The bank will assess the strength of the lease, the strength of the tenant and the location, and provide you with a loan to valuation ratio (LVR) for your loan. Most of the time, that's 65 per cent, so you need to come up with 35 per cent deposit plus costs. On a $1 million property, you need to come up with a deposit of $350 000, and allow for 5 per cent of the purchase price in costs. These costs include but are not limited to stamp duty, legal and any of the due diligence costs you may incur in purchasing the property. This doesn't include any buyer's agency fees. So to buy a $1 million property, you need a deposit of around $400 000 if you want to go for a lease doc loan.

A lease doc loan does not test you for servicing; it does not look at what other assets you have or how complicated everything else you own is. It's great for a developer, or a highly leveraged residential investor who wants to get into their first commercial property, but is unsure how, because they can no longer service any more debt. The bank normally wants the property to be held in a separate structure to everything else you own, so it's quarantined. Then if something happens to the property or you, and you cannot make mortgage repayments, it's easier for them to take back the property.

Lease doc loans are for the set and forget investor who is looking to finance a pure cash flow property. If you want to buy a property on a short term lease, and you want to do an uplift, a lease doc loan is not for you.

Now you can see why, even if you buy a 5 per cent yielding property in Sydney or the Sydney fringe, for most investors buying a $1 million property, it's still a good deal. They're going to get $25 000 in net positive cash flow after mortgage and all outgoings, without having to be tested for servicing. Without having to go through the rigmarole of examining expenses like you have to do with residential, looking at what you spend on Netflix. All you have to do is show up with a deposit. The bank does the valuation. If the valuation comes in on contract price, the bank takes five to seven working days to approve the loan. Then voila, it's done. You now have a magical positive cash flow

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