If you’re a would-be commercial real estate investor, chances are you’ll be thinking about how to finance a commercial property investment purchase.
Lenders have created products to cater to the financing needs of commercial property investors, meaning that commercial property loans come in all shapes and sizes. More than ever, finding the most suitable finance will require research and some commercial loan market know-how.
Here are 6 things you should know about commercial property loans before you apply for finance:
1. You’ll need a decent deposit
When you are applying for a commercial real estate loan, the banks or lending institutions will generally lend between 65% and 70% of the value of the property (this is called the Loan to Value Ratio or ‘LVR’). There’s no Lender’s Mortgage Insurance on offer for commercial loans so you’ll either need to come up with a large deposit or be able to access a significant amount of equity to satisfy the LVR criteria.
2. Loan terms are shorter
For commercial property, you can expect loan terms generally between 3 to 15 years. Principal & interest repayments are normally assessed over 15 years, irrespective of the loan term. The upshot of this is that the repayments will be higher as the principal will need to be paid down in a much shorter time frame, compared to residential loans. When the income for loan repayments predominantly comes from rent, the loan term is usually set within the remaining term of the lease excluding options. In this instance, the repayments are typically assessed on an Interest Only basis with loan terms ranging between 3 to 5 years depending on the tenancy profile.
3. Valuation costs will be passed on to you
Commercial properties have relatively higher valuation fees compared to residential properties which usually need to be paid for up-front by you. Valuation fee quotes are generally obtained from two or three valuation firms. The costs can vary depending on the property. As an example, a valuation report for a commercial property located in a metro CBD location with a value less than a million dollars may cost around $1,500.
4. Interest rates are negotiated case by case
Ever wondered why commercial loan interest rates can be difficult to find online? This is because, unlike regular home or investment loans, the interest rates and fee structures on commercial loans are negotiated on a case-by-case basis. Each lender has a different risk appetite with rates and fees offered to you based on a number of risk factors including your overall financial position, property location, tenancy profile and LVR.
As a rule of thumb, you’ll generally pay a higher interest rate for a commercial loan than a home loan. The key to getting a competitive rate and fee structure is to find a suitable lender and negotiate based on reducing risk factors such as reducing the LVR, which could be achieved by contributing a larger deposit through cash or equity available in other residential or commercial property you own.
5. Specialist commercial lenders can be a great option
Mainstream lenders whilst providing competitive commercial lending products, often have specific qualifying criteria which may not cater for your specific situation.
The second-tier banks and specialist non-bank commercial property lenders can sometimes offer more generous terms and conditions than the traditional bank lenders, including loan terms up to 25 years, a more generous LVR as well as no annual reviews or reporting requirements.
6. Commercial investment property is permitted under Self Managed Super Funds
When it comes to SMSF borrowing, the LVR offered by the banks or lending institutions generally ranges between 60% and 70% of the property value. The repayment structure is usually principal & interest from the outset with repayments calculated over 15 years. Servicing for these loans is typically based on member super contributions and rent paid to the SMSF.
Depending on your circumstances, buying a commercial property through your SMSF can be a great way to grow your wealth and take advantage of considerable tax benefits. There are specific rules and requirements to negotiate, so be sure to seek professional guidance from your financial advisor if you’re considering buying commercial property through your SMSF.
How The Loan Tailor can help you
Commercial lending policies can be complex to navigate and aren’t as black and white as they are in residential lending. So, it pays to have an experienced commercial broker on your side from the get-go.
Whether you’re seeking a better deal on your existing commercial property loan or looking to invest in commercial property and want to know more about your financial options, call Andrew on 0410 731 292.
This article provides general information only and has been prepared without taking into account your objectives, financial situation or needs. We recommend that you consider whether it is appropriate for your circumstances and your full financial situation will need to be reviewed prior to acceptance of any offer or product. It does not constitute legal, tax or financial advice and you should always seek professional advice in relation to your individual circumstances. Subject to lenders terms and conditions, fees and charges and eligibility criteria apply.