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Broker Commercial Property Guide & Tips
1. What is Commercial lending?
Commercial lending is a style of lending that involves purchasing commercial assets. With property, this is generally defined by the style or volume of dwellings. As an example, if you purchase one unit as an investment property, this will most likely be considered residential, if you were to purchase five or more units, this is commonly considered commercial. This is just one example of a large array of commercial securities.
Our Tip: Unless you’re a business owner, start off as an astute residential investor, gather experience and then move into commercial investment opportunities.
2. What are commercial interest rates like?
Commercial lending rates usually sit a percent or two above residential rates, this is natural for the lending risk, but can reduce significantly depending on the type of property (sometimes even lower than residential). Your deposit, property type & location or at times, the type of tenant can impact the rates available.
Our Tip: Maximise your deposit as much as possible to increase yield as an investor, it really can make a significant impact.
3. What type of Commercial Loans are there? And how will I know the one for me?
There are 6 potential loan options for you which all depends on multiple factors of your circumstances and goals. Such factors include your desired purchase, collateral, commercial buying experience, and general borrowing capacity.
Below is a quick outline of the 6 options:
Commercially secured loans:
Already owned commercial properties (accepted by the bank nominated) to be used as financial collateral to secure next commercial property.
General loan to value ratio 65-70%
Some major banks may offer an LVR of up to 80% for small businesses borrowing < 1 million
Rates: This type of product will generally attract very competitive rates.
Residentially secured loans:
As a business owner, you may be able to use your residential property as security for a business loan.
Commercial loan through a Self Managed Super Fund:
Heavily regulated, both assets and uses are restricted
Many lenders are moving out of this space, so options are limited
Typically, interest rates are very high in this space and lenders will require large deposits, often more than 20% of the property price.
Low doc loans:
Very little paperwork
Declare earnings in form of accountant declaration OR business activity statements (BAS)
Higher risk for lender
Typically attract increased rates due to a higher risk position from the lender
No doc loans:
Basically, a pure asset lend
Criteria: make sure not a criminal and that you exist
24 hour turn around
Private lenders only
Comes with higher valuation and a lot of upfront fees
You need a mortgage broker for this one as it is highly unlikely of securing this loan as just a consumer
Our Tip: To get the best loan for you speak to your broker, we will be able to discuss your position and options available to you in detail.
4. What do you think are important basics to understand before buying a commercial property?
If you are thinking about investing in commercial property, it is important to understand a few key points.
Commercial property relies heavily on tenancy agreements. The strength and length of the tenants in the property can have an impact on the valuation and the way a lender considers a commercial loan application.
Buying commercial property will often demand a higher deposit size.
It is very important to consider the type of property you are buying and the market it will appeal to. Make sure you do your research on the current demand for the property type you want to buy, especially if the property is purpose built for a specific industry or business type.
Commercial properties are often bought through an entity or business to separate the debt and asset from your personal finances. Ensure you speak to your accountant to understand the ins and outs of the process.
5. How can my mortgage broker help me with buying a commercial property?
Your broker can compare lenders and rates available as well as negotiate with lenders to ensure your rate is competitive.
Commercial lending can be very niche. Depending on your personal position and the specific property you are buying, some lenders may excel at the transaction whilst others may not be able to consider it. Your broker will do this research and due diligence on your behalf to save you significant time, fees, and stress. Having a broker means you do not have to shop around with banks to find a lender that will be able to facilitate the transaction and provide a competitive product that suits your needs.
6. How does buying a commercial property differ from buying residentially?
Purchasing commercial property buying is starkly different to residential purchasing as you will come to find in the coming questions of this article.
Much like residential lending, commercial lenders heavily lean on the 5 Cs of Credit when assessing a commercial application: Character, Capacity, Capital, Collateral, and Conditions
Our tip: is to speak to your broker to discuss how your overall position may be perceived by a lender.
7. What are the benefits of buying a commercial property?
Commercial properties like all investments and new journeys come with risks, but you may have heard of certain benefits such as:
Strong returns – Historically providing strong returns as a combination of capital gain and income.
Income stability – Returns are generally higher and more secure as property returns fluctuate considerably less than returns on shares.
Lower risk – Less volatility in commercial property values (if you own the right property).
Exposure to different sectors of the economy – These properties have a direct relationship to the general state of the economy.
Tax benefits – Owning commercial property can have significant tax benefits – be sure to chat to your accountant about how this might impact you.
Hedging against inflation – Have continued to outpace inflation.
Investment control – As the owner of the property you have significant control over your investment. You can control the renovations, change of use, amending of lease terms, etc.
8. What are the negatives of buying a commercial property?
As with all things, the positives of commercial property buying, comes with the negatives right behind them:
Lack of liquidity – Selling commercial properties can take extended periods of time.
Lack of pricing information – pricing is less readily available as it is for residential properties. You may find some information on the Property Council of Australia website www.propertyoz.com.au or fr other such websites;www.commercialrealestate.com.au or www.realcommercial.com.au
Scarcity of other information – There are very few resources available for those interested in getting started or wanting to learn more about commercial real estate. You can find some additional information like this post in the Australian Financial Review and some published agency reports.
Higher Cost – Entry level costs for purchase is usually higher than the residential real estate counterpart. This is partly due to the price of good commercial investments is substantial and lenders require much larger deposits.
Ongoing management – Although not as much property management as a residential property there are still required ongoing managements for the owner of the property. Commercial property can be very expensive to maintain. Take into consideration, repairs, covering costs while vacant, legal costs, management costs, lease incentives, etc.
Vacancies – Vacancy periods when they occur can be significantly longer.
Economy Vulnerability – Commercial properties are often more vulnerable to the economic climate than residential properties.
9. How do I get started in buying commercial properties?
Our most common commercial clients are either applicants that own a business & are looking at considering purchasing some office space, or high-income clients looking at styling a different form of investment. On occasion, we do have clients that have made significant gains on splitter blocks, re-development or even just the natural property market growth that are looking at extending into commercial investment to increase yields.
Consider the entity you will be purchasing through and reach out to your solicitor and accountant regarding advice on how to structure the entity and ownership structure to suit your requirements.
Our Tips:
Set realistic goals and ensure that you have a deposit of approximately 20% for a self-tenanted commercial property or 35% for commercial investment.
Make sure to organise a solicitor and accountant early in the process. Or ask us for some recommendations on who to reach out to; we love referring our clients to fellow skilled professionals who have proven their ability to get the job done efficiently
10. Commercial Property Valuations
The commercial valuation process can be time consuming and much more costly than a residential valuation. Each lender uses a varied panel of valuers who they can accept a valuation from.
The value of a commercial property again remains starkly different to how a residential property is valuated, commercial real estate is largely driven by rental returns and the potential for capital growth. Commercial property yields vary from 3.5% (premium location with strong long-term tenants) to about 10% (poorer location with weaker tenants). Other such factors affecting the return include capital growth potential, redevelopment, and tax-related factors.
Since commercial property values rely heavily on their rental return and potential income, a vacant property will likely carry a significant discount for lease. However, this also creates great opportunity to buy and find a tenant for long-term lease leading to its increase in value
Keep in mind: A strong economy is the fundamental basis for increasing property values.
With the Reserve Bank raising interest rates this has a knock-on effect to potential company health and growth. With rising costs, the rate of company growth slows, as well as consumer spending which may have the potential to affect your commercial property.
Our tip is to speak to your broker early in the piece and once you have narrowed down a lender, ensure your broker orders the valuation ASAP.
11. Investment differences for Commercial properties
Here are some property investment differences with commercial and industrial properties you should recognise before embarking on this journey:
Commercial properties usually yield a higher return as opposed to residential properties.
Commercial property leases tend to lean towards longer periods.
Rent reviews generally are charged at a per square meter, these rent reviews are incorporated in the lease document. Rent reviews may be calculated every year-18 months, so keep a look out for any changes.
Tenants usually pay all the outgoing finances (rates, taxes, insurance).
Tenants of industrial and commercial spaces tend to look after their spaces better than property tenants. This also helps for property management as commercial properties are less management intensive on the owner.
Lenders will often only lend up to 70% of the value of commercial/ industrial properties. Usually, mortgage insurers do not lend on commercial properties, this means the investor needs to come up with more equity.
The initial capital required for a commercial property is considerably higher – for example could be up to 2-3 x the price of a residential unit.
Vacancies when they occur are considerably longer in a commercial property.
The cycle of commercial properties is vastly different and extremely dependent on the general economic factors of the market.
The lease required for your commercial property will be significantly more complex and will require a solicitor to prepare it. Talk to our brokers for great recommendations, we love recommending fellow skilled professionals.