Why financing your first investment property is easier than you think.
Many first time investors ask me “James, I don’t think I have enough money to purchase an investment property”
My response is “Commercial property is all about Math”
Many novice buyers don’t know where to start on their investment journey.
My suggestion is start with the numbers and more importantly the cash you have available to sink into that first commercial property.
Lets start by looking at sources of cash. How much do you have available?
Do you have cash savings in the bank?
Do you have an existing residential property?
Do you have other assets you can sell and convert to cash?
If you own a home or another property, leveraging equity in your house or an existing investment property can be an effective way to enter the market.
For those who ask “ how much is my equity?” The equity calculation is the difference between what your home is worth and what you owe on the rest of your mortgage.
If your home is worth $800K and you have $350K left to pay off your mortgage your equity is $450K – simple, you can generally borrow a portion of that.
The amount of cash available for a deposit will also provide you with options for your commercial property.
The good thing about commercial is the huge variance in price. You can get into an income producing property for 150K.
In Australian residential markets that just doesn’t happen.
At the moment 90% of people are looking for residential properties to invest in, only 10% are looking for commercial.
Would you prefer to be in the 90% or the 10%… Yep that’s what I thought.
So let's look at a few examples of how you might get into the market.
First I have made some basic assumptions
For all examples we will assume the following:
30% cash deposit,
Loan type is interest only at 5%
Property finance is 100%.
Property return rate is 7.5%
So assuming 50K deposit we buy a property of value of 150K.
This gives us approximately $11K rental income and after we pay the mortgage we have disposable income of about $3k
Not too bad at all.
But what can I buy for $150K? Plenty of commercial properties are located in regional areas of Australia and also some in major cities.
The property types would typically be small strata-titled office and retail properties, small garages, storage facilities and strata warehouses.
Let's look at another one.
Same assumptions on deposit and loan type and finance.
I have a 200K deposit, which would allow me to buy a property worth between 570-600K
This property would give me net rental income of $42K per year.
After I pay the mortgage I will have approximately $12,500. surplus
Again, what can I buy? In this case a bit larger strata office, maybe a mixed-use retail shop or larger warehouse.
What I should remind you is, as you move up the dollar value, competition for properties becomes less.
Quality increase very quickly with price. More more equals larger sized, redevelopment potential and maybe some unused land for rezoning.
So to set you on your way.
First work out your numbers. How much can you invest?
Start checking out some properties in that price range and get a feel for what is good value.
Narrow your search down and become expert on a particular property type or location.
Talk to your finance broker and accountant and have them help you work out the level of commercial property you can afford – LVRs can be different with commercial, although depending on the price range, not always.
Learn to do the numbers so you can spot a good deal quickly and if you've got your finance in place and ready to go then when you spot a winner you can pounce like a cat on a mouse and grab yourself a property that will work for you for years to come.
Then you'll will be on your way to positive cash flow and your property empire.
To get more detail about what kind of property to buy and what is going to give you the highest returns register for my free webinar: Register FREE Here