Why Borrow?
You have the cash to purchase and don't need to borrow. However are you maximising your returns?
Let's look at the following examples based on the lower end of financiers' requirements of 50% equity.
Example 1
No borrowing, your capital outlay $750,000:
- Unit Value:
- $400,000
- Business Value:
- $350,000
- Total:
- $750,000
- Income:
- $75,000 (multiplier of 4.75 times)
- Less interest on loan:
- Nil
- Less Tax:
- $22,000 (company rate 30%)
- Net Return on Investment:
- $53,000 (7.1%)
Example 2
Borrow 50% of Purchase Price your capital outlay $750,000
- Unit Value:
- $400,000
- Business Value:
- $1,100,000
- Total:
- $1,500,000
- Income:
- $220,000 (multiplier of 5 times)
- Less interest on loan:
- $60,000 (say 8%)
- Less Tax:
- $48,000 (Company rate 30%)
- Net Return on Investment:
- $112,000 (14.9%)
Return on investment can also be enhanced from maximum borrowings against a complex.
Above example was on a 50% deposit however minium deposits can be as low as 30% and thus you will be looking at returns up to 20% or more.
Which way to go?
This will be your personal choice, however, as the above examples clearly reflect, there are major advantages in borrowing to increase the return of your capital outlay.