Naritas Commercial Finance
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While many are sceptical of investing in commercial real estate due to the perceived higher risk (compared to investing in residential property), commercial property can provide significant cash flow benefits, greater rental certainty due to longer rental periods and fewer ongoing expenses.
If you do your research, practise due diligence and understand the risks involved, commercial real estate could be a valuable addition to your property portfolio – an option that you may not have previously had on your radar.
If you're considering a commercial loan, compare the options from Naritas Finance.
Camilla has been tossing up between purchasing a one-bedroom apartment in Woollahra or a small childcare centre in Turramurra, NSW.
After speaking with a property investing specialist and projecting her estimated cash flow, Camila decides to invest in the private childcare centre as it was only marginally more expensive compared to the apartment, and she believed it could potentially provide greater return as she wouldn’t have to worry about covering maintenance or council expenses. What’s more, Camilla conducted some research and discovered that infrastructure projects, transport links and services surrounding the childcare centre were likely to increase the accessibility of the area and potentially boost up property prices.
After consulting a lending specialist, Camilla soon attracted a corporate tenant who signed a five-year lease and spent $40,000 on a new fit-out. Camilla reviewed the annual statements of the company and conducted a cost-benefit and risk analysis to discover that the company had sufficient financial resources to meet the rental payments.
Camilla was satisfied with the quality of her tenant because she believed that the tenant’s initial investment would add significant value to the property, and it would also ensure that the tenant remains in the property for at least the five-year lease period.
It’s important that you understand that investing in commercial real estate differs significantly from investing in residential property. While you still rent out the property and receive rental income from the tenant as you would with residential investing, there are some core differences.
The core differences between commercial and residential property investing include:
Before investing in commercial real estate, you need to think about what you’re trying to achieve from the investment. For instance, you may want to think about the purpose of your investment, such as one of the following:
When investing in commercial real estate, investors should be aware of local prices and market conditions, council restrictions and zoning regulations, and the condition of the property including any safety hazards.
Reviewing a potential tenant is one of the greatest considerations for your investment. It’s important to check their references and previous business experience.
The ability to manufacture favourable terms and finance conditions is another important consideration.
When selecting the location of your commercial property, you should consider its accessibility to transport hubs, surrounding business enterprises that could offer support to your tenant’s business, as well as a lack of similar properties in the suburb to ensure that there is not an oversupply of commercial properties.
Review current infrastructure plans that are currently underway, but also consider future infrastructure developments that could put upward pressure on property prices. You can do this by logging onto the local council website or speaking with local real estate agents.
Find a strong corporate or ‘blue chip’ tenant that has financial resources to meet the rental payments and is unlikely to default on the rent. You should also review its business model, brand assets, annual statements, resources and even industry trends to determine whether or not this is a suitable tenant.
Consider the structure or ‘bones’ of the property and whether the layout can be easily changed to attract different types of tenants. A multi-purpose space can also help you attract a wider pool of potential tenants.
A major factor in commercial property growth is demand, which is largely driven by economic indicators such as population growth.
The current low interest rate environment will support demand for both property and borrowing. However, rising interest rates could potentially dampen demand for commercial real estate, as the cost of finance and rent becomes more expensive.
Large infrastructure projects can boost demand for commercial property. For instance, the development on the M7 in Sydney generated demand for warehouse properties in the surrounding precincts of the M7.
Australia’s ageing wave of baby boomers has greatly increased demand for health care services such as aged care facilities and medical centres. For example, federal government expenditure on health care services and facilities is expected to increase from 15% of total Commonwealth expenditure to 25% by 2050.
Suburbs with strong population growth undergoing gentrification may require new services such as shopping centres, financial service companies and restaurants.
During an economic downturn, demand for commercial property generally falls due to sluggish economic growth and poor business confidence. It’s also important to consider whether or not the investment may be susceptible to major economic downturns.
While long lease terms can be advantageous in providing rental certainty, they can also present a risk in the sense that it may take longer for you to find a tenant once the premises are vacated. If your property is vacated for an extended period of time, you’ll need to ensure that you’re well equipped to cover the carrying costs until you can find a new tenant.
Keep in mind that larger commercial properties may be more difficult to lease than smaller properties and will typically be more expensive to hold.
It’s a good idea to keep tabs on the supply indicators of the area. For instance, an increase in property within the area may create a threat since existing tenants may look to upgrade or expand.
Individuals, trusts and companies can purchase investment properties. For individuals, an ideal structure to use is a self-managed super fund (SMSF), which can also provide investors with tax benefits.
Most commercial property loans work in a similar fashion to residential home loans. You can choose from variable, fixed or a split rate, as well as making principal and interest or interest-only repayments.
Generally, banks will lend up to 60-70% of the property value, but this loan-to-value ratio (LVR) is also based on the potential rent or yield that can be generated from the property. You generally need to complete a deposit of at least 30% of the property price to gain approval for a commercial mortgage, but this will depend on the lender’s individual terms. If you’re an existing homeowner, you can typically borrow against the equity in your home.
You may want to consider a line of credit commercial home loan that provides you with funding up to a set limit so you only pay interest on the funds drawn down.
You should carefully consider the following when reviewing the terms of the lease:
The value of the commercial property will be determined by a variety of factors. These may include the size of the property and some of the features of the building itself. The amount of people traffic shouldn’t be the main reason as to determining the value, consider the land value as well. For example, industrial zones generally have low land value, but may be suitable for particular types of businesses like a taxi depot because it may be close to public transport.
Valuations should be done on prospective commercial properties as part of the due diligence process. Use this as a tool to research whether a particular property is viable for your needs. A valuation of a commercial investment property for lending purposes is a comprehensive and expensive undertaking. Therefore make sure get the right valuation at the right time to spend your money wisely;
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