Lease Doc Loans, What Are They?
If you have been thinking of getting into the commercial property market, a lease doc loan may be the vehicle to use to get your foot in the door. The Covid-19 pandemic has taken its toll on commercial tenants and landlords alike. What this means is that there are some great opportunities out there for commercial property.
Commercial properties can have great returns on investment and can be lucrative for the savvy investor. Rent returns can typically vary between the 6-11% and some times higher, though quite rare. Another great positive about commercial property is that the tenant usually pays all outgoings with regards to utilities on the property.
If owning commercial property is that great, why are all investors not doing it? I hear you ask. It is a riskier investment in that vacancy rates are a lot higher and longer than your typical residential investment property. This is reflected in how the banks treat the commercial property with regards to LVR and loan terms. Loan to value ratios usually start at the 70% mark, meaning that you will require a 30% deposit at the minimum.A more typical LVR for a lease doc loan would be around the 65% LVR and can dip as low as 40%. Most of your main lenders will look at a loan term of 10-15 years maximum. This means that getting into a commercial property can be difficult because a large deposit is required and monthly repayments are high because of the short loan term.
Enter a Lease Doc loan. This is a loan product that will solely rely on the income from the commercial property for servicing. A client will still be looked at individually to make sure that their personal life is not relying on that income too. As long as you can sustain your personal life in terms of income, then the commercial loan should be assessed as stand-alone. If you can find a property that has a good tenant with a high rental income, a lease doc product can assist you in getting into the commercial space. The main thing you will need is te 30-40% deposit.
As a lease doc product as in the name is relying heavily on the lease, lenders normally want to see a good term left on the tenant’s lease to consider the deal. The rental income will usually be shade at 70%, and this will need to service the loan at the reduced amount over their term.
With the current Covid-19 restrictions in place, lenders want to know the tenant’s business has not been adversely affected by this and are sometimes wanting further information from them with regards to financials or future outlook. This has made securing a lease doc loan tricky at times, but better that than the new owner facing financial difficulty because his tenant is.
If you have been considering entering the commercial market as an investor, then a lease doc loan may be the way you secure the first of many properties. Castle Mortgages are mortgage brokers serving Adelaide and the surrounding areas. Castle Mortgages consider commercial property as one of the many arrows in their quiver. If you need assistance in structuring a finance deal to purchase your first commercial property, Castle Mortgages can help. Get in touch with us, and have we can have a chat over a coffee.
Please note that this article is general in nature and should not be constituted as advice. It would be best if you always had a chat with your financial advisor or accountant before making a decision, like purchasing a commercial property. Your circumstances are specific to you, and you should always seek expert advice on that situation.