Financing the purchase of investment property
QUESTION: I am currently considering buying a property for $35 million in a well-established community. This property can bring in a monthly rental income of $300,000 and is currently bringing in $270,000 for the current owner who lives abroad and is too old to continue managing the property. Could you advise me as to how to go about securing the best financing for this project?
FINANCIAL ADVISER: Mortgage financing is available from the building societies, credit unions, and some commercial banks.
These institutions differ in their approaches to mortgage lending, but there are also differences in the approaches of institutions of the same type. You need to call these institutions and ask relevant questions to determine which best fits your requirements.
I suggest you seek to know the following from each institution: the definition of investment property; interest rate; the maximum term of the loan; the maximum sum that can be borrowed; whether you need a prior relationship with the institution; and the eligibility requirements.
You should be able to make a good decision after comparing the answers.
One of the major building societies defines an investment property as one that is not the borrower's primary residence; provides financing of 75 per cent of valuation or purchase price, whichever is less, for properties of up to $25 million and 66.67 per cent for properties of over $25 million. The interest rate in both cases is 10.50 per cent.
This compares to 90 per cent financing at 9.29 per cent for residential properties to be occupied by the borrower.
Another building society seems to be less concerned about whether the property is owner-occupied or rented. It offers 90 per cent financing at 9.39 per cent, hardly more than the 9.29 per cent that it charges on mortgages for owner-occupied properties.
One credit union seems not to be concerned about whether the property is to be occupied by the owner or is to be rented in terms of the rate it charges, which is 12.95 per cent.
However, it is prepared to offer 100 per cent financing for properties to be occupied by the borrower as opposed to 85 per cent financing for properties that will not be occupied by the owner/borrower.
Age is a major consideration in relation to the term of the mortgage. The maximum term set by one credit union is 25 years, but the difference between the borrower's age and age 65, generally seen as the retirement age, is also considered, so some persons may not be able to borrow for so long.
One building society generally sets a maximum term of 25 years but extends the term to 30 years if the sum to be borrowed exceeds $15 million.
Whereas the building societies do not require borrowers to be members during the pre-qualification process, credit unions require membership of any person who wants to borrow.
Income weighs heavily in determining if you are eligible for a mortgage. The bottom line is that the lenders want to be certain that you can make the required payments when they are due. Additionally, your debt obligations are also very important to them.
The building societies, for example, want to be satisfied that you have the ability to make your monthly payments from your existing income without considering the projected income from the property for which you want financing.
How different even the same type of institutions are can be seen in the approaches of the building societies to the time within which the application must be made after the end of the pre-approval process.
In one case, pre-approval is valid for 90 days, but it is renewable upon presentation of any document that has expired or changed. The other building society does not put a time limit.
You should not rule out the commercial banks, though. One of them provides 90 per cent financing and lends up to $40 million for a maximum period of 30 years, although how close you are to the retirement age could influence the term.
It will take careful research and time to decide the best approach to take. It seems clear that all the institutions I mentioned will not suit your situation. Bear in mind that there are several other expenses to consider in addition to the monthly payments and the deposit.
n Oran A. Hall, a member of The Caribbean Financial Planning Association and principal author of 'The Handbook of Personal Financial Planning', offers personal financial planning advice and counsel.