How to finance a commercial property investment
Commercial properties are favoured by some investors as they typically generate higher returns than residential properties, along with having other benefits such as longer leases.
So many investors shy away from investing in commercial property because of its complexity and higher risk – especially when looking at how to finance the asset.
Financing a commercial property purchase can be daunting for new investors, and it is easy to be overwhelmed. So use a commercial finance broker.
This guide answers some of the key questions facing commercial property investors when applying for a loan.
What documents does a bank need for a commercial property loan?
The key consideration is the rental income and the strength of the tenant. This plays a part in determining the value of the commercial property and risk of the deal.
Some basic things you'll need for a commercial loan application:
– details of any existing lease, including the length of the lease agreement – if the property does not have a tenant, you need to demonstrate how you will afford to maintain the property and make repayments – your income details, including the rental income from the property – your deposit and equity from other properties, if any – details of the property itself, including the asset class (eg, industrial warehouse), location and valuation
Investors need to show details of their financial situation in the past two to three years and their trust deed if their company is set up as a trust business structure.
How much can you borrow when buying a commercial property?
Your LVR for a commercial loan is typically less than a residential loan, however many lenders are going up to 80% LVR.
Unlike residential property where you can borrow as much as 95 per cent of the property’s value, most lenders require borrowers to have a minimum contribution of 20 per cent when applying for a commercial loan. In other words, the lender will consider lending up to 80 per cent of the property’s value.
It also depends on the security purchase price: for sub-$1 million acquisitions, the LVR can be more than purchases above $10m. It's lender and asset class specific, which is why you should engage a broker to do the research for you.
Buyers of commercial property also cannot access lender’s mortgage insurance, so it is essential to have a sufficient deposit or equity to qualify for the loan.
However, there is a good chance of scoring approval if you are buying a traditional commercial property (for example, an industrial warehouse) with a stable tenant that will be in the space for another few years.
What to consider before applying for a loan
A mortgage broker who focuses in commercial property loans can tell you precisely what you need to know before making an application.
They will also have the right relationships with key lenders and can recommend lenders according to your situation, as they will know the ins and outs of each lender’s different criteria and loan options.
Given that the process differs substantially from a traditional residential mortgage, it is always best to speak to a broker first and foremost to confirm indicative rates and terms and leverage.
A specialist broker will also be able to help you negotiate the terms of the loan, especially on bigger loans. And as commercial property loans are more complex, having legal and financial experts on your side is also essential to comb through the terms of the contracts and lease agreements
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How is commercial property lending different to residential?
Commercial properties are more susceptible to slumps in the economy. Lenders generally consider these to be a higher-risk investment than residential.
While lenders for residential property loans are fairly transparent with their interest rates and often have carded rates, this is not the case for commercial property loans, for which rates are not always easy to understand - get a broker!
Terms on the commercial property loan can almost always be negotiated. Commercial loans are more complex and are generally priced on risk, which means that the more risk you present to the lender, the higher your interest rate will be.
Several factors will determine risk, such as the location of the property and demand for the type of property – often the more specialised the property, the lower the demand, and therefore higher the risk.
For instance, assets including offices and warehouses are seen as “standard commercial properties” because they appeal to a larger pool of tenants, while spaces built for a specific purpose such as hotels and service stations are seen as riskier as potential tenants and buyers are limited only to businesses in that sector.
Commercial property loans can still have 30 year loan terms, however some lenders will only go to 15 years. It's truly lender specific.
Common misconceptions surrounding commercial property loans?
2. There is usually a commercial valuation cost - roughly $1,800 to $3,000.
– commercial valuations, which are generally higher than residential valuations, due to their complexity. They also need to be paid upfront.
– lender legal costs, which covers the lender’s costs of preparing legal documents and services, and
– lender application fees, which are negotiated and are tailored to each deal.
As a guide, the fees can range from 0.5 per cent to more than 1 per cent of the loan amount.
3. Be wary of is vacant commercial properties: those buying vacant commercial properties should aim to have a tenant lined up as soon as possible. They can sit dormant if you don't have the right people around you.
Are you looking for a commercial loan pre-approval? Or have you found that perfect property?
Give me a call for a chat. I'm a commercial broker that does not charge a fee; I'm paid by the lender.
Matthew Stack - 0423 237 242
Loan Market
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