What Can I Afford?
What you can afford will depend on a number of factors including:
- How much cash funds you have available
- Do you have other property to supplement as extra security for the bank
- Will the income from the complex be adequate to service the debt.
The banks are most keen to lend to the management rights industry due to low failure rates and as such will generally lend 80% against the managers unit and 55/65% against the management rights business. Some banks will look at 70% of the combined value.
With these borrowing limits in mind the general rule of thumb in establishing an upper limit on the size of the complex to look at is multiply your cash funds x 2.8 times.
For example, if you have $500,000 cash available you would be looking for complexes up to the level of $1,400,000.
Whilst this calculation will normally fall in line with the banks maximum lending guidelines it is also most critical that there is also adequate income to service the debts.
This can be the let down at times... if the complex you are looking at has a very high value on the managers unit and thus represents a high percentage of the total purchase price, income levels will generally not be adequate to service maximum borrowings.
At times prospective managers may still have property to sell to realise cash funds for the purchase.
Depending on the debt serving requirements the banks will look at lending 80% of the residential property value.
This arrangement is also looked at if you wish to retain some residential property.
The key factor in all cases will be that the bank is satisfied with the income levels to service any proposed debt.
" Barry's knowledge of the banking industry and experience with Management Rights impressed us, with the result being a very smooth exercise in obtaining finance that was also very competitive."
Brian & Michelle Walker - Riviere on Golden Beach