There is no doubt, you can certainly accelerate your overall return from Commercial property, by gearing up with a loan.
Even so, you should FIRST make sure that you can say “Yes” to each of the following questions.
- Am I approaching this purchase over a 5 to 7-year time frame?
- Is borrowing the only way for me to reach my Investment Objectives?
- Do I have other income, outside of what the property will generate?
- Would I be able to cover the mortgage payments, if interest rates were to rise 3%?
- Will my equity represent at least 30% of the overall value?
- Does the intended property make sense, without relying upon depreciation benefits?
Understanding the proper Time Frame
While you may choose (or need) to sell your commercial property in 3 or 4 years’ time, you ought initially approach each purchase as a 5 to 7-year exercise.
And that’s mainly because your greatest costs (as with any investment) will always be at the beginning and the end of every transaction.
Therefore, it is always wise to spread those costs over a least 5 years — rather than look to turn properties over quickly.
Adequate Coverage
Assuming you have no choice but to borrow … your financier will (and you should too) be concerned about having sufficient coverage for your mortgage payments.
For most Commercial properties with 70% gearing, your tenant should cover your normal loan payments at current interest levels.
But what if the tenant were to leave at the end of the lease? Or interest rates were to suddenly rise?
The 2nd issue can be resolved by simply fixing your interest rate, to provide you with greater comfort. Whereas tenant continuity is probably best addressed by ensuring your property is professionally managed.
That way, there will be a good ongoing relationship established with the tenant. And every likelihood of the lease being extended.
Bottom Line: Commercial property is capable of providing you with some quite extraordinary returns.
But like any business venture, you need to plan things out AND have a clear set of Investment Objectives & Buying Criteria.
With those in place … sensible borrowing can then greatly enhance the overall results you achieve.
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