I’ve figured out a way to buy a property w/o having to get a mortgage. Tell me what you think?

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Let’s say I want to buy a commercial property for 200K and don’t want to put do 30% and get into an 8 – 10% interest rate commercial mortgage. I own a very profitable company which grosses 1M per year, Bank are always offering this company large loans or equity lines on the business. What if my company borrow me some money, at a fair interest rate of say 5% simple interest and I use it to buy this property ?

What are the advantages and disadvantages? From what I can see. I will have lots of money on the loan (interest) and not have to make a large down-payment and I’ll own the properly free and clear.

Thanks guys.

4 Comments
  1. Reply
    snwbm
    February 1, 2011 at 8:45 am

    You would also get a write off for your business.

    I get the same offers for business loans and equity lines and they are around 7% though. Are you sure you can get a loan for 5% for the cost of the building?

  2. Reply
    Ken Clark, CFP
    February 1, 2011 at 9:27 am

    Questions I would ask, but don’t necessarily have answers to (which means find an accountant):

    1. Does this transaction violate the IRS principal of an “arm’s length” transaction?

    2. What is the structure of your business? If it is anything but a sole-prop., and you are an officer, could it cause your status to be revoked.

    3. Will the interest be interest you pay to yourself be deductible (likely not)?

    4. How does a lawsuit against the company affect the property? It likely exposes it to a greater risk of loss, than if the company was an LLC (or similar) and owned by you.

    Just some thoughts…

    Ken Clark
    Certified Financial Planner

  3. Reply
    Oh Boy!
    February 1, 2011 at 10:11 am

    First, you’re wrong if you think an unsecured loan to your business (given the size of your business) is going to have a lower interest rate than a secured mortgage.

    Second, the interest from that loan won’t be deductible. In order for an expense to be deductible for the business it has to be “ordinary and necessary”. Interest on this loan hardly counts.

  4. Reply
    tallencanada
    February 1, 2011 at 10:16 am

    Advantages:
    – you don’t need the downpayment
    – you may get a lower rate, although mortgage brokers can get you a good deal too.

    Disadvantages:
    – It isn’t a business expense so you can’t write off the interest there, however, if it is a personal loan/mortgage I think in the US, not Canada you can use the interest as a tax write off as long as it is clear who owns the interest.
    – it isn’t arm’s lenght which may be an big issue
    – you will need to figure out how to repay the loan to the company…you may save the interest but you don’t gain the money in hand to pay the loan back.
    – the bank will still have a hold of the property if they need you to sign for the loan…banks always want collateral.

    Personally, I wouldn’t go that route unless it is an investment property for your business.

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