The interest rate.
What is a commercial property loan and how does it work?
A commercial property loan is a business loan specifically designed for the purchase of property to be used for business purposes. This includes office space, warehouses, motels, or farms - in short, property that isn't being used as a personal residence. These loans can be taken out by individuals, partnerships, discretionary trusts and other groups on behalf of a business or company.
The loan features higher borrowing amounts and higher interest rates compared to a residential property loan. This is because commercial property loans are perceived as more risky. While there is a chance of a bigger return on investment, commercial properties also experience higher vacancy rates. In comparison, residential property is lower risk but may offer lower returns.
As with other loans, commercial property loans feature regular repayments inclusive of interest and fees. Interest can either be fixed or variable. Repayments will have to be made within the loan term, which can range up to 30 years. There will also be fees, such as establishment and even monthly or annual fees. With repayments, you may have the flexibility of making principal and interest payments or interest only payments during certain periods. You could opt to split interest between fixed and variable for certain periods. Additional repayments may be possible.
How can I compare commercial property loans?
There are several factors you should consider when comparing commercial property loans, including:
How much deposit do I need for a commercial property?
Scott O'Neill, Founder & Director at Rethink Investing
"The maximum loan LVR you would usually receive when buying commercial property would be 60–70%, with some banks offering up to 80% loans, unlike the 90–95% now available for residential property," he explains.
"This is because commercial property is deemed more risky in the lender's eyes, resulting in a lower loan to value ratio. Where residential property can be purchased with as little as $50,000, commercial property is $75,000–$100,000 as a minimum."
That said, O'Neill believes that despite the higher upfront cost, a commercial property can be a good investment due to the higher rental returns.
"High-quality commercial property has the potential to pay itself off in 10 years, compared to the traditional 30 years a residential property might take. That means all that money that usually goes to the bank after the debt is paid goes straight into your pocket. It opens up the possibility to leverage equity allowing you to purchase a second, third and fourth property. So the decision to pay a higher deposit in the beginning starts paying dividends afterwards," he says.
What types of commercial property loans can I apply for?
There are a number of commercial property loans you can apply for depending on the type of funding you need. These include:
- Commercial property loans. This loan is designed for the purchase of commercial property, or if you wish to refinance an existing loan. Borrowing amounts are high and interest rates are higher than residential property loans.
- Property development and construction loans. These loans are useful for constructing commercial properties, residences and sub-divisions. You can read more about how to finance a residential property development project here.
- Sub-division finance. Subdividing land can increase the value of the property without the need for further construction. These loans can be used for construction purposes too.
- Mezzanine finance. You can use mezzanine finance to complete a project or an expansion or to borrow additional capital. This type of loan is used when a bank loan doesn't cover all your finance needs.
- Business or commercial loans. If you want to purchase an existing business or a franchise, you could apply for a standard business or commercial loan.
- Factory finance. This loan can be used to finance everything from the purchase of factory equipment to the factory itself. There are lenders specialising in factory finance who can help you navigate this space.
- Land bank finance. This loan can be used for the purchase of undeveloped or abandoned properties and vacant lots. You can create, hold and develop vacant properties and convert them into marketable assets, doubling or tripling your investment.
- Rural property loans. These loans are ideal for builders who purchase rural property to sell as hobby farms or residential homes.
What to keep in mind when making a commercial property purchase?
Every commercial property is different. But there are some general tips that can help smooth out the process. These include:
- Evaluate the risks and benefits before proceeding with the transaction.
- Get advice from experts. This can include lawyers, accountants, commercial realtors and mortgage brokers.
- Pick a suitable property with a clear title after checking the applicable zoning laws and development plans.
- Make sure you have sufficient funds for the deposit. You should have a regular income or revenue stream that can meet the monthly payments. Do the math beforehand and assess how the repayments fit into your budget.
- Go through every detail of the sales agreement. You need to be aware of your rights and obligations.
When and why should I use a mortgage broker?
Commercial property lending is far more complex than residential home loan lending. Making sense of loan options and features can be confusing. Different lenders specialise in offering loans that suit different types of commercial property buyers. There may be a lender who specialises in offering finance for startup businesses. Another may be able to offer better deals to a commercial property investor or a developer.
This is where a mortgage broker can simplify your task. An experienced broker can use their knowledge of commercial property lending to find a lender that offers the most suitable finance solution. They will assess your current financial situation and your borrowing requirements and help you find a loan that matches your unique needs.
What documents do I need to apply for a commercial property loan?
The information and documents you'll need to provide will vary depending on the lender you select, the type of property you want to buy and the amount you need to borrow. As a general rule, you may be expected to supply:
- Personal and company information. You'll need to provide your name, contact details and proof of ID. You may be required to provide your ABN or ACN.
- Financial details. You'll need to provide details of your assets and liabilities, including the size of the deposit you have saved. You'll need to provide cashflow projections. This is for the lender to calculate your ability to meet repayments.
- Property details. The lender will want to know details of the property you want to purchase, such as its location and features. A professional valuation will determine how much the property is worth. Even if you're buying the property as an investment, you'll need to provide details of the current lease agreement and the type of tenants currently residing on the property.
Other information, like your business experience may be required. Your mortgage broker can help you prepare an application that addresses the necessary criteria and gives you the best chance of approval. If your application is rejected or delayed, a broker can help you work out what you can do to improve your chances of accessing finance.
Why you can trust Finder's business loan experts
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We are independently owned and have a mission to help Australians make better financial decisions. That means our opinions are our own and you can compare nearly every business loan in Australia on the site (and find a better deal).
Since 2015, we've helped 50,000+ people find a business loan by explaining the options simply. You don't need to give us any details to use our tables. We're here to help you make a decision.
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