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Our team of commercial loan specialists at Island View Mortgage are always staying up to date with current market trends, economic fluctuations, and developing changes in the world of commercial finance. Current and accurate information is crucial for providing our clients with the appropriate financial tools and strategies necessary to maximize their investment. We assist clients in structuring their transactions to minimize risk, reduce costs, lower income tax burdens, and maximize returns.

Below are a few examples of how our innovative financing approach is employed:


Scenario 1 - The purchase of a 2 million dollar apartment building

Client's Assets:

  • Stock portfolio worth $1,000,000 (non-retirement account)
  • Liquid assets / cash equivalent to $300,000
  • IRA/401K account worth 1.5 million dollars

Transaction Assumptions:

  • Purchase price of 2 million dollars
  • Financing available is 70% loan-to-value, which is a loan amount of 1.4 million dollars
  • Closing cost for this loan of $65,000
  • Monthly payments for this loan of $17,700 for principal and interest
  • The property currently has a net operating income of $25,000 per month

Down Payment:

In the scenario above, if the client liquidated non-qualified stocks for making the down payment, they would incur tax consequences, therefore, it may be advantageous to self-direct $600,000 from an IRA/401K retirement account through a third-party facilitator such as Service Financial. The pre-requisite here is the ownership would need to be structured where 30% is owned by the IRA/401K and the remaining 70% would be owned by the client individually or their designated entity. If desired, the individual could vest the entire property into their IRA/401K however they wouldn’t be able to personally receive any of the monthly cash flow as it would all be placed in their retirement account.

In this example, the client is able to use the money in their IRA/401K account for making the down payment without having to liquidate their retirement account and pay an early distribution penalty.

From the net profit of $7,300 per month, $2,190 was paid back to the client’s retirement account while the remaining $5,110 was paid to the client individually or to their designated legal entity.

Based on this scenario:

The return on investment of cash invested vs. total cash received equals 14.60% per year.

Since the client utilized their self-directed IRA/401K to complete the transaction, per IRS ruling, they become a passive investor and can not participate in management, maintenance, or any other daily operating activities related to the apartment complex.

 

 

Scenario 2 - Purchase of a 1.5 million dollar gas station and car wash

Client's Assets:

  • Stock portfolio worth $700,000 (non-retirement account)
  • Liquid assets/cash equivalent to $100,000
  • IRA/401K account worth $400,000

Transaction Assumptions:

  • Purchase price of 1.5 million dollars
  • Financing available is 65% loan-to-value, which is a loan amount of $975,000
  • Closing cost for this loan will be $45,000
  • Monthly payments for this loan will be $12,500 for principal and interest
  • Property has a net operating income of $18,000 per month

Down Payment:

Island View Mortgage recommends the client collateralizes the $700,000 in qualified stocks and borrow $525,000 in the form of a fixed-rate five year loan (fixed rate of interest = 3.5%). The payment for this loan comes to $1,531 per month. They still receive all future capital gains along with dividends/interest paid by the investment.

The client is able to use liquid cash to cover the closing costs and working capital. Securities based loans are categorized as a non-taxable transfer and therefore are not subject to taxation – assuming the loan is repaid within the five year period and the minimum market value is maintained during the term of the loan. The securities based loan may also be renewed upon maturity for an additional five year term. The net income from the property in this scenario would be $3,969 per month.

Based on this scenario:

The return on investment of cash invested vs. total cash received equals over 9% per year.

 

 

Scenario 3 - Two partners are acquiring a shopping center for 5 million dollars

Client's Assets:


Partner One has:

  • Stock and investment portfolios worth $2,000,000 (non-retirement account)
  • Liquid assets / cash equivalent to $250,000
  • An IRA account worth $1,000,000

Partner Two has:

  • Stock and investment portfolios worth $700,000 (non-retirement account)
  • Liquid assets / cash equivalent to $150,000
  • An IRA account worth $500,000
  • A $300,000 home equity line of credit on his primary residence

Assumptions:

  • Property has a net operating income of $55,000 per month
  • Financing available is 70% loan-to-value, which is a loan amount of $3,500,000
  • Closing cost for this loan will be $125,000
  • Monthly payments for this loan will be $40,000 for principal and interest

Down Payment:

Partner One:

  • Contributes $200,000 in cash
  • Liquidates stocks/investments worth $200,000
  • Borrows $350,000* in a loan from a friend at an interest rate of 8.5% with the note being place as a second mortgage on the property.
    • The monthly payment on this loan is $2,480 per month.

Partner One & Two are 50/50 partners in the business and therefore each partner receives $7,500 per month in cash flow. Partner One's net profit is $5,020 per month or $60,240 annually.

Based on this scenario for Partner One:

The return on investment of cash invested vs. total cash received equals over 8% per year.

Partner Two:

  • Contributes $300,000 from his home equity line of credit at a 6% interest rate
  • Contributes $450,000 from a securities based loan that carries an interest rate of 4% by collateralizing $600,000 of their stock portfolio

Total monthly payments for both of the above loans equals $3,000 per month. Partner One & Two are 50/50 partners in the property and therefore each receives $7,500 per month in cash flow. PartnerTwo's net cash flow is $4,500 per month.

Based on this scenario for Partner Two:

The return on investment of cash invested vs. total cash received equals 7.20% per year.

*This note could be loaned from a self-directed retirement account or a private investor.

Island View Mortgage takes into account the various asset holdings of each client. This thorough approach allows us to make recommendations which assist clients in maximizing their return on investment. Contact us today and receive a financial analysis for your next commercial real estate project.

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