In my last email, I talked about the many sources of financing available to commercial property investors.
Now, I’d like to get into the types of loans that you can take out if you want to invest.
The thing is, a loan can be your best friend or your worst enemy. Choosing the wrong loan is like dealing with the devil – you’ll get what you want, but the price will be too high.
On the other hand, the right loan can make all your investment goals come true without much burden. If you play your cards right, repayment should be no trouble.
But before that, you need to know how much you will actually be able to borrow.
As you know, many lenders have tightened their standards and lowered their required Loan-to-Value Ratio (LVR) to 60-70%. Residential investors have it much easier, as the LVR for residential property is up to 90%.
However, you might be able to borrow more if you’re looking for a property under a million dollars. In this case, a lender may be able to give you up to 80% of the purchase price.
That aside, let’s now talk about loans. To keep things simple, I’ll go through some of the most common types that you can apply for.
The first one is a no-doc loan, which was a popular option before the GFC. They went away for a little while but they seemed to have resurfaced in recent times.
Not every lender offers them, but a few may be able to give you the funding you need this way.
No-doc means that you don’t have to provide any data about your finances. All you have to do is sign and the lender takes it on trust that you can repay.
Of course, the penalties for failing to pay tend to be pretty harsh.
Now, with a cashflow-positive commercial property, this shouldn’t be an issue. A lender will see that you can repay the loan from the returns that you’ll get, so there should be no trouble here.
Full-doc loans are a much more common option. The lender will require you to provide all sorts of information and proof that you can repay the loan comfortably. Don’t worry because in one of my future emails, I’ll show you all the information that a lender might ask for.
Another popular form of financing is a revolving line of credit. To be eligible for this option, you should have some equity in your existing property. If you do, this can be a great way to secure funding, as you won’t have to spend as much of your own cash to get the financing you need.
Next, refinancing can be an excellent way to gather the money you need. When you refinance your loans, you can consolidate them, making it much simpler to repay them. Plus, you can save some money on interest and put that towards your next investment.
From there, we move onto interest only loans. These are among the most common loan types from commercial property investors.
During the loan term, you don’t have to pay any principal. Instead, you just pay interest at the rate agreed with your lender.
A great advantage of an interest-only loan is that it’s much more tax-effective than the principal and interest option. Plus, it provides you with optimal cash flow so that you can have enough cash on hand when you need it.
If I kept going with the list, it would take you forever to read this email. What I have highlighted above are some of the most popular financing options that you should explore. In most cases, one of them will be right for you.
It’s not easy to choose the loan product that suits your needs the best. So if you need any help, go ahead and sign up for my webinar.