Commercial Property Loans
Whether you’re building your portfolio or just starting out, find out everything you need to know about commercial property loans.
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A commercial property loan is a way to help you purchase a commercial property.
Getting a commercial property loan can be a drawn-out process. But it is also an excellent tool to help you grow your property portfolio or help reshape your business.
What are commercial property loans?
These are loan products available to you when looking to purchase a commercial property.
The basis of them is essentially the same as a residential home loan, where a deposit will be made that is a portion of the property’s value, and then the loan will be paid back at a rate over a set term. But instead, you will of course be purchasing a commercial purpose property. You may also be required to take one of these out if you're looking to purchase a business such as a caravan park, as you may need to purchase its land and/or any buildings on the property.
What do I need to get approval on a commercial property loan?
To get a commercial property loan, you will need to prove a substantial amount about your property and yourself to a lender. This includes:
Details of any existing lease
- An existing lease increases the likelihood that you will be able to make the repayments on your loan due to the income coming in from the lessee.
- The longer this lease is set to last, the better.
- If there is no tenant you will need to prove that you can afford to maintain the property and make the required repayments on it.
Details about the property
- The type of property it is, such as an office, warehouse, retail space, car yard, restaurant etc.
- The location of the property.
- The current valuation of the property.
- Show details of your financial history from the past 2 or 3 years
- Similar to applying for a residential home loan you will need to provide documents and details of your finances. However, this will be further reaching back than it would be in a residential situation.
- If you do not have much or any financial documentation, you may be eligible for a no-doc or low-doc loan.
What deposit do I need for a commercial property loan?
To understand what sort of deposit you would need to pay on these loans, you need to know what levels of loan to value ratio (LVR) you would be getting on a commercial property loan.
The level of LVR you pay will directly correlate with the value of the property. For example:
- For a property valued under $1,000,000 you would likely need an LVR level of 80% or less.
- For over $1,000,000, you would need an LVR level of between 65% and 75%.
What should I be looking for in a commercial property?
It all of course depends on what you need or are looking for in a commercial property. But if you want the most borrower friendly property, you should focus on the following aspects:
The property is not specialised
- The more specialised the property, the more limited access you have to tenants and lessees.
- Properties that will have more access to tenants and lessees are more general properties including offices and warehouses.
Strong location
- Depending on the type of property, you should take into account its location.
- Proximity to transport, thoroughfares and similar surrounding businesses are important.
- Take for example a manufacturing warehouse in the middle of an office district, in comparison to an industrial area.
Why are the interest rates different between commercial and residential property loans? How can I get a lower rate?
The difference in asset class between residential real estate and commercial real estate will mean a difference in rate between the two markets. This is because they are two different types of assets with different characteristics.
The difference in rates can also be attributed to the typically shorter loan periods found with commercial property (usually between 2 and 15 years as opposed to 30 which is common practice for residential loans).
How can I get a lower interest rate
Getting a lower interest rate can save you large amounts of money. Particularly at the backend of your loan, as you may be able to repay your loan faster. Here are some ways you can get a lower interest rate:
- Make sure your property is in an ideal location.
- Build up your deposit to get as low an LVR% as possible.
- If there is a current tenant, make sure if you can that a long lease is in place.
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How to get a commercial property loan
Assess your finances
Before going to a lender and before even finding a property, you need to work out if you are in a position to make a deposit on a property and continue to make repayments on it.
This means going through:
- Your income
- Assessing tax returns
- Assessing any recent BAS statements
- If you are an investor working as an employee, using recent payslips.
- If you are a business owner, assessing your sales levels and forecasts and any other investments or income you may have.
- Your expenses
- All costs associated with other debts and investments.
- As a business owner, all expenses and outgoings from your business.
Find a property
This step shapes every aspect of getting a commercial property loan making it a large financial decision.
Make sure you do your research and use the guidelines mentioned earlier when discussing what you should be looking for in a commercial property.
Assess lender offers
An excellent way to gain a strong understanding of what lenders will offer is to have a look at Savvy’s commercial property loan rate table. By looking at the rate table you will be able to compare lenders against each other to find the right deal for you.
A commercial mortgage broker can also be a large help in this step of the process as they know the market better than anyone else. If you are a business owner, you may sometimes be able to find a broker who specialises in your industry, this is also the case with property investors.
Prove your stability to your lender
Proving your stability as a borrower to your lender could save you large amounts of money both in the short term and long term. Having an adequate amount of this proof could lead to:
- Securing a lower than market average interest rate
- A reduction on fees
- A higher LVR% and lower deposit
Settlement
The settlement process does not differ much between commercial property loans and residential property loans.
First you and the vendor will sign all the relevant contracts of sale. Following this, an inspection will occur and after the contract of sale documents have been processed, a date of set
What’s better, residential or commercial property investing?
Commercial property investing Pros
Rental return is higher than in the residential property market.
Leases will usually be much more permanent than residential rental tenancies, making things more predictable.
The lessee will pay for all maintenance costs.
Commercial property investing Cons
In most cases, more reliant on location than residential.
Closer ties to the state of the economy than residential investment. In economy slumps you will likely see a bigger fluctuation in commercial tenancy than residential.
Specialised properties will limit prospective tenants.
Higher deposit and initial investment needed.
Higher risk levels.
Residential property investing Pros
Safer investment than commercial property.
Vacancy periods are often far shorter.
Lower deposit and initial investment levels required.
Residential property investing Cons
Lower rental returns.
Higher instability with tenants.
Landlord will need to pay for all maintenance and repairs.
