There are many investment options in Australia such as land, shares, bonds and real estate. Among these, there are many that choose to buy commercial property.
A residential property is a relatively safer investment so why buy commercial property? What are its risks and benefits? What finance products are available?
Find out about this and more on how commercial property can help you improve your portfolio.
Why do people buy commercial property?
Generally, people buy commercial property despite it being considered a higher risk because it offers:
- Long term leases: Leases on residential properties tend to be for six to 12 months. If you buy commercial property, you can expect it to range anywhere from three to 10 years. You can then use the cash flow from this to improve your investment portfolio.
- Higher rental returns: Although it’s considered higher risk, commercial property usually provides higher rental returns. Add this to a long lease term and it ensures a stable and steady cash flow.
- Absence of rates and outgoings: Unlike residential property, the tenant pays all outgoings such as maintenance costs, rates and corporate fees. This way, you’re making a higher profit on the rent.
- GST implications: When you buy commercial property, you’ll have to pay Goods and Services Tax (GST). This may cost up to 10% of the purchase price. However, GST charged on the property’s rent can be claimed back as an input tax credit.
- Availability of smaller investments: Most residential properties are large and quite pricey. However, you have the option to invest in smaller, new or off-the-plan commercial suites. These are relatively low risk and you won’t need a large deposit for them as well.
It’s a good idea to make the proper considerations and learn the risks before you buy commercial property though.
What finance options are available?
Banks have many types of commercial property loans on offer. The pricing of these loans usually depends on the application itself.
There are other specialised commercial loans as well, including:
- Low doc commercial loans: If you can’t prove your income then this can be an option for you. A low doc commercial loan can be taken out using an accountant’s letter, BAS statements or bank account statements.
- Lease doc commercial loans: In a lease doc loan, the lender relies on the strength of the rent income from the security property that you provide. This way, you don’t need to show any payslips, tax returns or other financial statements.
- No doc commercial loans: You won’t need to provide any financial statements with a no doc loan. However, lenders have stricter criteria and usually reject specialised commercial properties such as petrol stations.
- Bad credit commercial loans: Lenders can accept a limited bad credit history, arrears and reduced income evidence with this. However, you’ll likely have to pay a higher interest rate and need a large deposit.
- Specialised commercial property loans: This is for specialised commercial properties such as aged care facilities, hotels, pubs, and more.
- Franchise loans: This includes mortgages for commercial franchises such as domino’s, donut king and subway.
You can also take out a commercial loan using your super fund. However, you’ll need to watch out for higher interest rates.
Our mortgage brokers specialise in commercial property loans. We can help you apply for the right commercial loan with the right lender at a competitive rate.
You can speak with one of our brokers by calling us on 1300 889 743. If you want one of us to contact you instead, you can simply complete our free online assessment form.
How much can I borrow?
Different banks have different risk profiles and maximum loan amounts. The amount you can borrow also depends on the strength of your application and what you apply for.
Generally, the maximum amount you can borrow is:
- 80% Loan to Value Ratio (LVR) for loans up to $1 million.
- 75% LVR for loans up to $2 million.
- 70% LVR for loans up to $5 million.
Lenders assess applications for commercial property loans more than $5 million to $50 million on a case by case basis.
If you use a residential property as security, you may be able to borrow 100% LVR.
Considerations before you buy commercial property
As with any investment, you’re likely to lose money if you don’t make the proper considerations before making a decision.
It’s a good idea to consider the following before you buy commercial property:
- How much can you afford? You’ll generally need to have significant equity to buy larger commercial properties. Since you’re in it for the long term, make sure you can afford buying the property.
- Are you familiar with the area? Consider the location of the property and the infrastructure it has access to. Although cheaper, commercial properties in remote locations or without proper infrastructure may not make you money.
- What do you know about the tenants? You can look for strong corporate or government tenants with long term leases. A commercial property with multiple tenants is also preferable. Also consider the ability of the tenant to pay the rent.
- Will your security property be accepted? Your commercial property loan application may be rejected because of your security property. Lenders prefer properties that aren’t specialised and in a good location such as a regional centre.
- What loan features do you need? You may be paying more than you need to if you have commercial loan features you never use. Decide on only those features that can help you meet your goal. For example, if you’re planning on refinancing soon, don’t fix your interest rate.
It’s recommended that you buy commercial property only speaking with a professional financial advisor.
What are the risks of buying commercial property?
Commercial properties are considered high risk mainly due to the following reasons:
- Sensitivity to economic conditions: Strong economic conditions usually result in an increase in commercial property demands. However, an economic downturn usually results low demands. You may have to time your purchase or sale.
- Tenancy not guaranteed: Although leases are usually long term, tenancy isn’t guaranteed. It may take a long time to find a tenant and you’ll need to cover all property expenses during this time. If you want a guaranteed rental return, you can invest in a Defence Housing Australia (DHA) property.
- Values can drop suddenly: The value of a commercial property can drop sharply if it becomes vacant or its lease is about to expire.
- Impact from changes in infrastructure: Changes in infrastructure of nearby areas can lure away potential tenants. This is more likely if your commercial property is older.
However, please note that there are ways to increase your commercial property value cheaply to attract tenants or potential buyers.
How can I qualify for low commercial loan interest rates?
Many lenders base their commercial loan interest rates depending on your level of risk on their risk matrix. This risk matrix generally considers the following:
- Location, condition and appeal of the security property.
- Current as well as future state of the local property market.
- Ability to repay the mortgage, LVR and asset position of the borrower.
- Management experience or track record.
- Your property portfolio and the level of diversification.
- Length of time until the lease(s) expires.
Please note that the above is simply general information. Lenders will also consider anything else that they may perceive as a risk.
Do I need a mortgage broker when I buy commercial property?
There are many reasons to use a mortgage broker when you buy commercial property.
Mortgage brokers have valuable experience and are credit specialists. They have relationships with many banks and lenders.
You can buy commercial property yourself but a mortgage broker makes it all much easier. They can also help you qualify for a commercial property loan at competitive interest rates.
You can discuss your situation and loan needs with one of our mortgage brokers by calling us on 1300 889 743. You can also fill in our free online assessment form and one of us will contact you instead.