Investors are often reluctant to consider commercial property investment. We invited Graeme Salt, a Director of Chan & Naylor Finance to discuss the pros and cons.
Many property investors start out investing in homes but, after a while, the more sophisticated investor looks to broaden their portfolio. One such example could be venturing into the commercial property market. Here are some of the do's and don'ts and why investing in commercial property is easier than one might think.
- Diversification – you avoid over-concentrating in the residential sector. Commercial lending can be arranged for many things: shops, offices, cafes, factories, warehouses, car spaces, and medical centres, to name a few.
- Return – commercial property tends to have a higher return. A current example is a newly financed shop on the Gold Coast with a rental return of eight percent; whereas on average residential property is returning half that at the moment.
- Flexibility – banks have more discretion on to whom they can lend. With a residential loan, the banks are black and white – either you have the income to service the loan or you don’t. On the other hand, with commercial lending, banks will take into account more subjective things like your business plan or whether you have a history in running a business.
- Tax – commercial property offers more tax benefits than residential, but you need to talk to a good accountant about this.
Although banks have more discretion in determining commercial loan applications, there are two areas where they tend to be more conservative; the rate and the amount.
Typically, a commercial loan interest rate will be slightly higher than a residential loan and the banks will only lend up to 70 per cent. That said, the higher return more than makes up for the slightly higher interest rate.
Plus, there are times when the banks are particularly aggressive to win business.
Commercial investing is not for the novice investor, but there are many benefits.
It is important you know what you are doing before you jump in. Talk to a property specialist accountant like Chan & Naylor to make sure that you have the correct structure to invest in commercial property.
And, of course, get advice from a mortgage broker who can find you the best deals for commercial property loans and knows how to structure the loan correctly.
About the author:
Graeme Salt is a Director of Chan & Naylor Finance. His team has access to an army of business bankers that are not available to the public. Visit www.chan-naylor.com.au/finance to find out more or request a call back to discuss your situation.