So, you've made the decision to invest in commercial property. Congratulations! Some investors are well aware of the process required to invest in residential property but is commercial property different? Negotiating the purchase of a commercial asset can be tricky. When it comes to investors or owners looking to purchase commercial property or refinance a current property there are a few things to know.
What’s the right type of commercial property?
Research the best type of property for you, you may look at one of the three main types of commercial properties on offer; office, retail and industrial. You may also consider one of the many other options available such as medical, clinical, showroom, hotel/leisure, car yard, rural. Your business function will determine the best type of property to search for.
Jumping through hoops
Buying commercial property is often more expensive than residential property so your finance options may be limited, you may be subject to a rigorous application process before you get the loan approved. Some financial institutions split the loans into two categories; those below $3,000,000 and those larger than this figure. The difference here is in the services provided to you by the banks and financial institutions.. Some offer specialists that can help you when spending more than the $3M mark, especially for development and construction projects that require a staged payment process.
You still need to be pre-approved for a commercial loan, same as residential property investments. However, the negotiation for more expensive properties will be helped with the assistance of the bank who can offer a specialist to negotiate on your behalf. This is often the case for building projects and larger investments.
Things to know
Application Fees: Some banks and financial institutions charge an application fee between $1,000 and $2,000 refundable if you are not accepted for the loan.
Terms: Loan terms are between 5 and 20 years. You may be offered an equity loan, a variable rate loan, or a fixed rate loan.
Interest: Depending on the loan type you may be offered fixed interest for a portion of the loan term, some offer 5 years fixed interest for the 20 year loans.
Repayments: Similar to residential investments, a principal and interest or an interest only repayment loan can be available.
Tenants: Commercial properties may sit untenanted for long periods of time so be sure you can afford to pay the outgoings if you find yourself in this situation.
Good advice: It may not be a great idea to put the family home up as primary security for a commercial property, so having your investments stand alone can be a greater level of asset protection.
Investigate Lenders Mortgage Insurance (LMI) and see what options you have available. LMI is a one-off insurance payment which protects your mortgage lender against your default. LMI is commonly paid when the Loan to Value Ratio (LVR) is 80% or more. With some thorough research you may be able to avoid this fee.
The buck stops here
The purchase of your property may not be the end of the finance you require. Ensure you have enough provisions to pay for fit-outs, refurbishment and furniture.