Improving serviceability limit - Commercial?

Discussion in 'Loans & Mortgage Brokers' started by 2020 Property Investor, 17th Jan, 2020.

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  1. 2020 Property Investor

    2020 Property Investor Active Member

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    Hi There,

    I am about to start my investment journey.
    The strategy will be to purchase high CG resi properties in blue-chip suburbs.
    Overtime the assumption is that my equity will increase organically and through renos / developments.

    Along the journey, there will come a point where serviceability becomes an issue and the banks will limit financing.

    Question - Does commercial property (assuming higher yields) improve serviceability when getting close to the limits?
     
    2020 Property Investor, 17th Jan, 2020
    #1
  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Sort of
     
    Terry_w, 17th Jan, 2020
    #2
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  3. Beano

    Beano Well-Known Member

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    In my commercial investment journey so far the limiting factors have been
    1:finding suitable property (suitable for my plan)
    2:LVR (generally maxed out at 70%)
    3: debt reduction (principal reduction to bring debt to 40% at lease expiry . As it needs to be funded from tax paid income)
    4: interest cover (generally twice net rent to interest.)
    5:WALT (weighted average lease term.if too short the banks will not lend)
    6: Valuations not supporting the purchase price
    7: overload of tenant and property management from too many tenant and property issues
     
    Beano, 18th Jan, 2020
    #3
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  4. The Y-man

    The Y-man Moderator Staff Member

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    Chicken and egg - because by time you get close to the limits, you already need to have the comm prop.
    But to get the comm prop might drive you close to (or over) your borrowing limit anyway (due to lower LVR, debt reduction etc as outlined by @Beano)

    Then the income from your comm props may be discounted by banks in assessing your serviceability...

    The Y-man
     
    The Y-man, 18th Jan, 2020
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  5. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    Lease doc is a common, but more expensive rate strategy, which relies solely on the income from the lease

    ta
    rolf
     
    Rolf Latham, 18th Jan, 2020
    #5
  6. Omnidragon

    Omnidragon Well-Known Member

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    Have you found banks are lending at 50-60% LVR, on ICR it 1.3+ without any personal guarantee, for term of WALE at sub 4%?
     
    Omnidragon, 19th Jan, 2020
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  7. Beano

    Beano Well-Known Member

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    To have no personal guarantees the LVR needs to below 40-45%
    The WALT requirements depends on
    1: likelihood of tenant renewing (eg how much the tenant has invested in the improvements to the site.
    2: the number of tenants and their weighting. eg say 100 tenants highest % of portfolio from one tenant say 5%
    3: history of tenants renewing
     
    Beano, 19th Jan, 2020
    #7
  8. 2020 Property Investor

    2020 Property Investor Active Member

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    Thanks for the replies
     
    2020 Property Investor, 24th Jan, 2020
    #8
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