Getting creative with the rules of finance

The big 4 banks would have you believe that they are the one stop shop for all your lending needs.

They'll tell you that they are “reputable” and other lenders are not (they won't say it out loud but they will imply it)Truth is that there are heaps of lenders out there.

Second, third tier lenders and even private lenders could be used to get you into the deal you want.

It all comes down to deciding what is going to work best in the long run for that particular property and for your portfolio going forward.

The big questions is:”How do I know who to use for the next loan”.

The good news is that you don't have to know the answer to that question. This should really be up to your broker and loan strategist…

Which means that you really need to choose the right broker to help you with this. And in our case, you need to make sure (by asking directly) you get someone who had good commercial experience.

They will be able to find the right loan for your property.

Some of the things they will look at are as follows:

The LVR for each deal.

The prevailing myth is that commercial loans have a much tougher LVR policy with loans being more like 60% rather than the more common 80% usually seen in residential.

While that can be true for some properties – it's certainly not the rule. At the time of writing this if you are looking at a commercial property under $1m, chances are that getting an 80% LVR is very likely…

Which means a small deposit for a larger result.

With that being said, there are a few things that you might want to consider when it comes to getting the right loan.

Full-doc, Mid-doc, quick-doc (low-doc) loans can all work for financing your deal… But here's the thing…

The more docs you have – the more details you present with your loan application, the lower the LVR is likely to be and often also the lower the interest rate is likely to be.

There's also another loan option open to us as commercial investors, and that's the lease doc loan…

If you can prove that the tenant and lease are really solid and the rent more than covers the repayments, then you can submit that in-lieu of proving your ability to service the loan.

Usually, you've got to have a government tenant or big business in there. They typically won't entertain it if it's just a small business in your property as a tenant, but if you've got one of the big boys in there as a long-term tenant, this can be a great way to secure a property based purely on the merits of the tenant.

The longer the lease, the stronger the tenant, the better your options will likely be.

The same goes for full doc loans – the more suitable information you can give them, the better the deal they will tend to offer you.

Shorter Loan Terms are another consideration.

A typical residential property loan term is 30 years, whereas for commercial property can be as short as 10-25 years. This is not a rule – these things can be negotiable and again fall into the expertise of your broker to get you the best option.

Depending on the deal, and if the numbers are really good, you can also look at private lenders.

These guys usually have a much (Much!) higher interest rate, shorter loan terms and much more of a vested interest in your deal.

I have seen deals done where the property and the yield was amazing but the buy price well out of the price range of the buyer.

Their solution was to put in as much as they could and then supplement the deposit with some private finance.

This, of course, had to be paid back much faster and it meant that the cash flow for that deal was greatly reduced for a couple of years so that the private financiers could be settled.

But in this case the cash flow was so good that there was still plenty left over, and it meant the buyer could get into a property that was well out of their reach ordinarily. In this case, it was worth thinking outside the box for finance.

Unlike residential loans – there is a lot more creativity, flexibility and room for negotiation when investing in commercial.

But as with all things commercial, the stronger the deal, the more flexible you can be and the better deal you're likely to get.