Investing in commercial property has many advantages, from the tax perks to the strong returns and stability of income. But first, you need to navigate the path to securing finance. Although the application process for both investments is similar, The banking guidelines for commercial versus residential property loans vary quite significantly. As with any investment, you want to ensure that you get the best terms and interest rates possible. With that in mind, we have put together five tips to help you on your way.
Do Your Research
If you are buying a commercial property as an investment rather than a base of operations for your business, you have a great deal of choice. You might decide on a retail shopfront, an office building, a car wash, or a warehouse. Commercial lease terms vary dramatically, so if you have a friend in commercial property management, now is the perfect time to give them a call and quiz them about the pros and cons of each option. You need to think about the lease terms, outgoing costs, and purchase price for a start.
Calculate Your Borrowing Capacity
One of the most significant differences between residential and commercial lending is the loan-to-value ratio (LVR). In simple terms, LVR is the percentage of money that you will be able to borrow compared to the size of your deposit. With a residential property, you can generally borrow around 90-95% of the total purchase price. However, for commercial purchases, banks will only lend up to approximately 70% of the cost. Using these numbers, you can get a rough estimation of your borrowing capacity.
Investigate Specialist Commercial Lenders
Seeking a loan from the big four banks for a commercial property can result in restrictive borrowing conditions and high-interest rates. You are far more likely to get a competitive rate from a specialized commercial lender. The easiest way to find the right loan for you is to chat with a mortgage broker who understands the industry and can access second-tier lenders.
Get Your Documents In Order
Borrowing money always involves a fair amount of paperwork. Because the lending term for a commercial loan is typically 15 – 20 years, you need to be able to show the bank or lender that you can make repayments over this period. Gather together documentation, including rental income from any other properties you may have and your payslips to prove that you will be able to service the mortgage. Just like when you apply for a residential loan, now is probably a good time to close down any unused credit card accounts and pay off small outstanding debts.
Don’t Forget About The Loan Set-Up Costs
On top of the loan itself, there are additional set-up costs that you generally need to pay up-front. Make sure you consider these when you are calculating how much money you will need. Some of the expenses you can expect include lender legal costs and application fees. You also need to pay for a valuation of the property. While this cost is usually free for a residential property, the buyer needs to cover this expense when making a commercial purchase.
Don’t be scared off by the different structure of a commercial loan. With long-term lease arrangements and continuously stable returns that are consistently above inflation, commercial property is a sound investment. By following the tips above, you will be well on your way to becoming a successful commercial property investor.
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