I have come across this deal. It is a Guesthouse & B&B on 1.5 acres in a popular tourist town – operating over 30 years. It has residential 1 zoning so has the potential to be subdivided into 5 lots, also in demand in the area (an exit strategy if things go pear shaped)
I would appreciate some feedback/ideas in structuring finance to make it cash flow positive (if it is possible). I have played around with variations on LOC, P&I and Fixed loans and I get various degrees of success.
I have a $17K cash deposit and a $500K LOC available to fund part of the deal.
Purchase costs:
Purchase price = $432K
Purchase Stamp duty = $21.6K
Cash deposit = $17k
valuation/Building inpection = 2.1KAvailable LOC = $500K @ 6.22% (want to use minimum amount to fund the 40%)
Owners Expenses
Building Insurance = $1.5K
Annual Maintenance = $3.5KAnnual rental income = $42K
Thanking you in advance for your input.
PB[
]Hi PB
Just a couple of points (you may already be aware).
Commercial finance (this might be classified as commercial because it’s a B&B business) is more expensive than residential finance so perhaps the best way to fund this deal is out of your line of credit. Commercial properties have some great advantages over residential properties but the finance side of things is quite different – I have an article about this being published in the next issue of API magazine (but if anyone wants it now I can email it to you – email me at [email protected]).
One issue with this property is that it is quite ‘specialised’ and as such the pool of potential purchasers is smaller. This affects the liquidity of the property… just something to consider. But it seems you have thought about your exist strategy.
On my calcs if the total cost of the purchase is approx. $455k then the annual interest cost is approx. $29k… therefore it should be cash flow positive regardless of how you structure it (or an I missing something?).
By the way, 6.44% for a LOC of $500k is far too expensive. You should not be paying anymore than 5.97% – I would look at that if I was you.
Cheers
Stu
Property & Finance News
at http://www.prosolution.com.auStuart,
thanks for your suggestions and info – can anyone provide some scenarios projecting the costs and cashflows?
My goal is to use the positive cashflow to paydown the debt (as well as my own savings from time to time)
thanks again,
PB
Is the annual rental income derived from the rent paid to you by the lessee operating the business or from the B&B income? What length lease is with the property?
The rental income is derived from the lease holder operating the his accommodation business from the property.
The lease left is a 3x3x3 and and the lease holder is keen to renew to a longer lease arrangement.
Come on you financiers out there show me some numbers!!
thanks,
PB
Hi PB
Why don’t you post some of your numbers on the forum for people to comment…
I have played around with variations on LOC, P&I and Fixed loans and I get various degrees of success.The decision to go P&I, interest only, fixed is a very personal one and really depends on your investment objectives, risk profile and personal preferences.
To all those of you who have emailed me for my article – thanks – I’ll email it to you on Monday.
Cheers
Stu
Property & Finance News
at http://www.prosolution.com.auPB? What state is this in?
It’s in NSW…
Here are some rough numbers…
Required Loan Amount = $440K
PP = 432K Plus costs less 17k cash depBased on 60/40 LVR a possible loan split is as follows:-
40% $176K on LOC @ 6.22% Fixed = $10,947 pa
30% $132K on I/Only @ 7.4% Variable = $9,768 pa
30% $132K on I/Only @ 7.6% Fixed (5yrs) = $10,032 paTotal Interest = $30,747 say $31K
Loan Setup costs:
Valuation = $1K
Legals = $1K
Application fees = $1.5KOutflows
Interest = $31K
Annual costs (Insurance and Maint allowancance) = $5K
Total Outflows = $36KInlows = $42K
Positive Cash flow =$42 – $36 = $6K pa
COC return = 6/17K = 35%Any comments?
thanks again,
pb
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