How To Finance Your Commercial Property Investment

A lot of investors favour commercial properties as an investment and for the right reasons. The right commercial property can usually generate higher rental returns properties than residential property investment. However, if you’re a first-time commercial property investor, investing in commercial property might be intimidating because it’s not as common as residential property investment. Perhaps you’re unsure about the difference between financing a commercial property and a regular mortgage. It’s easy to be intimidated but don’t let it stop you.

This article will help you get started on your commercial property investment journey. It covers the general information you need to know in financing commercial property. 

The Commercial Lending Process

The overall process of applying for a commercial property loan is the same as applying for a residential property loan. Lenders will consider key criteria such as: 

• Your capacity to repay – all of your income including expected rental income from the commercial property
• Your deposit and any available equity
• The type of commercial property – whether it's a factory, office, warehouse or shop-front and its location, together with a valuer’s report.
• Details of the commercial property lease and conditions.

Things to keep in mind

1.Specialised Commercial Lenders

Even if the majority of the public is not familiar with commercial loans, there are a variety of loan options available from a range of specialised commercial lenders. 

Mainstream lenders such as the Big 4 banks will tend to offer borrowers, who are looking for a commercial property loan, their commercial lending products. These loans often have a higher interest rate and more restrictive conditions than their regular residential lending.

With the help of a mortgage broker who understands commercial lending, you can access second-tier lenders that specialise in commercial lending. These lenders are more competitive. Some loans even have the same pr close to residential mortgage rates, and even with annual fees waived.

2. Lower Loan-To-Value Ratios on Commercial Loan=Larger Deposits

Generally, Commercial property loans are limited at 70% LVR. This means that you would generally either need a larger deposit or be able to access more equity.

3. Shorter Loan Terms

A general residential property loan term last for 30 years, on the other hand, commercial property is typically between 15 to 20 years. The consequence of this is the repayments will be higher as the principal will need to be paid down in a much shorter time frame, even if it is interest only. This means that the borrower will need to have a greater capacity to repay to be eligible for the loan.

You will be required to show stronger serviceability in regards to your payslips, rental income on other properties and lease agreements, compared to the LVR you are planning to borrow and your other financial obligations.

4. Different Lease Terms 

There are a lot of different commercial lease terms and some leases come with benefits and incentives that can enhance an applicant’s loan application. An example of which is the length of lease and outgoings being paid by tenants. 

Commercial properties are subject to longer-term leases-- ongoing 3+3 years or 5+5 years with options to extend for another 3 or 5 years. Tenants in commercial properties are also more likely to pay their own outgoings such as water, rates and land taxes. This can help you have a favourable loan application as it can show a greater ability to service the loan.

5. More Fees 

A lender will need to order a valuation when you apply for a commercial loan. Unlike residential property valuations which are generally done for free, most lenders will pass on the cost of commercial property valuation to you.