Investment Property – Commercial or Residential

With many new investors entering the property market over the last year, competition for suitable residential investment properties has become fierce. As an alternative, some investors are starting to recognise commercial property as a viable investment option.

For most of us, a residential property investment is fairly straightforward and easy to understand, whereas commercial real estate is unfamiliar territory. Here’s a quick look at some of the things you may need to consider when investing in a commercial property in Australia.

 What is commercial real estate?

Commercial real estate is classified as property assets that are primarily used for business purposes. This property falls into three main categories: office, retail and industrial. 

Within these categories, size is often a determining factor in terms of the type of investor they attract. Small office space and retail shops are often just as popular as residential property investments. Larger offices and retail spaces, together with industrial property investments, are usually favoured by those with more commercial property investment/management experience.

As with most investment property, the capital growth potential of commercial property depends on its size, location and rental demand. In this respect, commercial and residential property investments are very similar.

The major difference between investing in commercial property compared to residential property is the rental agreement. With commercial property, the property is usually leased to a business under a detailed contract for a much longer period – typically three, five or ten years. 

Commercial property has some unexpected benefits

A commercial property lease includes fixed agreements for CPI annual rent increases, and offers the added benefit of the tenant being responsible for meeting the cost of all outgoings. This means that the tenant has to pay for just about everything, including rates, maintenance and even land tax in some states (where the tenant is a publicly listed company).

And when it comes to maintenance, you can usually expect your commercial tenant to do a much better job of looking after the place than a residential tenant. That’s because it’s important to their business that the premises look tidy, attractive and well maintained. This aspect of commercial property investment can save you a considerable amount of money and hassle compared to a residential investment, so it’s an important consideration.

Commercial property often generates higher rents than residential property of approximately the same price. Whilst smaller office and retail space usually returns about the same as residential property – around 4% – larger commercial properties and industrial properties often return as much as 10%.

What are the drawbacks?

One expense with commercial property that you won’t encounter with residential property is in the preparation of the leasing contract. This should be drawn up by a legal professional who is experienced in the commercial leasing area as it is a lot more complicated than an ordinary residential lease.

Additionally, commercial property is usually more influenced by the economy than residential property. Demand for your property will be determined by factors such as consumer confidence, unemployment, economic growth, interest rates and so on. Whereas demand for residential property is fairly constant.

These factors can often make it harder to find a tenant for your commercial property. You may find that you need to look harder and longer to find a tenant and you may have to make renovations or change of use applications with council to suit any tenant that you do find. This can prove to be time consuming and expensive (even though the changes may often be tax deductible, you could still find yourself out of pocket).

Additionally, lenders often apply stricter conditions to financing commercial property than they do with a residential property investment. For example, it is quite likely that you will require a 30% deposit to purchase a commercial property and for some specific properties, you may even require as much as 50%.

Location is key when considering a commercial property. You need to consider how your tenant will use the building and ensure it is strategically located to capture the right customers. For example, if you are purchasing a retail space you will need to consider foot traffic and parking. Additionally, there are often zoning restrictions that govern a building’s use and these need to be checked out thoroughly before you make your purchase.

Find out if the numbers stack up for you

With any property investment – whether it is a residential or commercial property – doing your research is the key to making a profit. Research your commercial property carefully and talk to us about your financing arrangements before you make the decision to buy. 

We can help you to determine if the numbers stack up for your choice of commercial property, work out if it will be in line with your investment strategy and goals, then help you find the most suitable financing for your objectives. It pays to talk to professionals about your plans well ahead of time, so if you’re looking at making a commercial property investment in 2015, just drop us a line.

ABN 62 953 405 689, Australian Credit Licence Number 391715

Things You Should Know About Refinancing Your Mortgage

Have interest rates fallen considerably since you took out your mortgage?  Has your credit score or financial situation improved so you may be eligible for a lower rate? Would you like to access your equity for an investment or renovations?

These are all great reasons to consider refinancing your mortgage. Refinancing can often be a good financial decision. You could possibly save money on repayments or free up funds to further your investment strategy. Refinancing can sometimes even let you take advantage of more competitive loan products that help you pay off your home sooner!

But before you rush in, you should talk to us, your professional mortgage brokers. We’ll help you to add up the costs involved and decide whether or not refinancing is the right move for you considering your personal circumstances and financial situation. In some cases, refinancing your mortgage could save you money, but in other cases, it could end up costing you more.

What is refinancing?

Refinancing is the process of paying off an existing mortgage by creating a new one. You can switch lenders entirely, or switch to a more suitable loan with the same lender. It could include combining a primary mortgage with a second mortgage, so that you only have one mortgage to pay and reducing the overall costs.

Refinancing often involves the same processes that you went through to obtain your original mortgage. So it pays to do your research to be sure that refinancing is worth the time and costs, and will help you meet your financial goals.

What costs are involved?

Understanding the costs involved with refinancing is an important part of deciding if this strategy is right for you. Sometimes, the cost of refinancing can substantially increase your loan amount and if this is the case, it could possibly cancel out any savings you might make on a lower interest rate.

Here are some of the costs involved with refinancing a mortgage:

Legal fees – As with your original mortgage, refinancing will involve the services of a conveyancing solicitor, as the same documentation will need to be processed and lodged in order for the settlement of your new mortgage to occur. Fees vary from solicitor to solicitor.

Stamp duty – This will be payable for any amount you borrow in excess of the original loan amount. So if you end up borrowing more in the refinancing process, it is likely you will have to top up the stamp duty as a percentage of the extra amount you have financed. The amount of stamp duty payable on refinancing varies from state to state – ask us to help you calculate it.

State government fees – Your conveyancing solicitor can confirm what government fees will be payable in your state. However, most states require you to pay both Registration of Mortgage Fees and Transfer of Mortgage Fees. 

Lender’s valuation fee – Most lenders will require your property to be valued (or re-valued) prior to agreeing to refinance. Your lender will expect you to pay this cost, even though they organise it themselves. They will not accept a valuation provided by you.

Loan application/establishment fees – These vary from lender to lender. We’ll be able to tell you how much this cost will be on the new mortgage you choose.

Exit fees – These fees are often charged by your current lender when you discharge your loan early. They generally apply to fixed rate mortgages and loans entered into before July 2011, but may also apply to other loans as well. They can include a variety of charges like discharge fees, break fees, document retrieval fees and so on. Your loan agreement should outline exactly what fees are payable when you exit your current loan. If you find this confusing, then we can help you discover exactly what these fees would be if you refinance.

Lenders Mortgage Insurance – If you borrow more than 80% of the value of your property, then you will most likely have to pay Lender’s Mortgage Insurance (LMI) when you refinance, to protect the lender in the event you can’t meet your repayments. Even if you already paid LMI on your original loan, it will be payable again when you refinance if you still owe in excess of 80% of the value of the property.

Talk to us about your goals

If you’re thinking about refinancing for any reason, then it pays to talk to us about your goals and the best way to go about achieving them. Refinancing might be a good idea for you if your financial situation has improved since you first took out your loan, as this may help you get a better rate.

Again, if interest rates were much higher when you first took out your loan, then it’s definitely worth checking out if you could be better off with refinancing, now that rates are at historical lows. If your equity has increased either by paying down your loan or by the property value rising considerably, refinancing may let you access funds for further investment, debt consolidation or for other purposes, like university fees or your children’s education costs.

In all of these cases, it’s possible the benefits could outweigh the costs and refinancing could help you to be better off. In the event that your financial situation has worsened considerably since you took out your original mortgage however, then refinancing should only be considered if you really need to reorganise things to meet your financial commitments.

If your financial situation has worsened, you may find that you are no longer eligible for the best interest rates – so there may be no interest savings to be had by refinancing. However, refinancing may allow you to access equity to eliminate or consolidate debt, reduce your mortgage repayments by spreading them out over a longer loan term, or give you a product that offers more flexibility during the times when your cash flow isn’t good. It’s a wise idea to talk to us about your situation as we’re here to help you to make good financial decisions.

The mortgage market is currently very competitive with lots of great products on offer, and we’re seeing some of the lowest interest rates for over 50 years. If you think that refinancing your mortgage may be a good move, please give us a call. We’re here to crunch the numbers to see if refinancing is right for you, and to help you find the very best mortgage available to you on the market, so get in touch today.

ABN 62 953 405 689, Australian Credit Licence Number 391715

Financing A House And Land Package

Buying a brand new home is very appealing to many home buyers. It’s a great way to get exactly the home you want. It can also mean that there are no unexpected surprises when it comes to the cost of home maintenance and this can make it much easier to budget in the first few years that you own your home.

One of the options when looking for a brand new home is to buy a house and land package. With many new housing areas being developed by professional property developers, you may find them also offering you ‘easy’ finance options as well as the house and land. However, like most mortgages, it is more advantageous to shop around. 

If you’re considering buying a house and land package deal, make sure you talk with us before you sign on the dotted line! We’ll do all the legwork for you and can provide you with a number of financing options for your house and land package, with loan features tailored to suit your personal goals and financial situation.

What’s involved with buying a house and land package?

A developer may tell you that organising finance for a house and land package deal is a lot more complicated if you organise it yourself. But this is not the case. It’s our job to help you get things organised and keep the process simple. 

Financing for a house and land package usually consists of two steps: buying the land and then building the house. Loans need to be arranged for each of them, but can usually be bundled together with the one lender. (It can usually be arranged for the loans to convert to one loan once the construction is complete.)

The land is purchased with a straightforward mortgage. Usually this is purchased first, with the mortgage registered against the title of the land when settlement occurs. 

To build the house, you will also require a construction loan. This is a specific type of loan that allows you to draw down on the loan at specific stages of the build. It also means that you don’t have to start paying interest on the entire loan straight away, you only pay interest on the money you’re using at each stage. 

Typically there are four or five stages of the build, when you will have to draw down on your construction loan:

– Building deposit (which has to be paid before construction will start)
– When the concrete slab (or flooring) is laid down.
– When the walls/roof are erected.
– When the house is capable of being secured, or ‘lock up stage’, and
– Upon completion of the project. 

During the construction period, the loan is often interest only which can save you money on your repayments whilst your home is being built. If this is the case, once the home is completed, the loan may revert to principal and interest.

Some benefits of house and land packages

Financially speaking, you may find it easier to get into a house and land package deal than an established home. You may need less savings because you don’t need to pay stamp duty on the house component of the purchase. That’s because stamp duty only applies to established homes. (Please note that in NSW no stamp duty is applicable if the property is going to be owner-occupied).

If you are a first home buyer, you may be eligible for the first home buyer’s grant in your state. In some states, this grant is higher for those building a home than purchasing an established home. Both of these benefits can substantially reduce the size of the deposit you need, or perhaps, the size of the loan you need to take out. Don’t forget to ask us to help you calculate how much you could benefit from the first home buyer’s grant.

Tips and traps

Even though you are technically buying your land and house separately, you will need to have a deposit ready for both parts of the purchase when you purchase the land. The lender will usually require you to be ready to contribute your portion of the total purchase up front, before they will approve your loan/s. When it comes time for you to begin drawing down on the construction loan, the bank will contribute the building deposit without any further deposit contribution being required from you.

But before you decide to go ahead with your house and land package, it’s important to sit down and carefully work out exactly how much it will cost to complete the project. Ask the developer exactly what is included in the build as there could be other considerations that you need to include in your budget. For example, is fencing, driveways, landscaping, carpets and clotheslines included in the price, or will you have to find money to pay for these items separately?

Remember that in addition to the cost of the land and the build, there will also be other expenses. Consider bank fees, legal fees or conveyancing costs and so on. Talk to us about these additional costs and we can help you to work out your budget.

Please note that the information in this article is general, so you should have a chat with us about your specific house and land package purchase and financing options before you make a commitment with the developer to go ahead. It’s always wise to be informed before you make any kind of financial decisions and we are here to help you make the right ones. If you’re considering getting into a house and land package.

ABN 62 953 405 689, Australian Credit Licence Number 391715