Commercial Investment Loan

Can I get home loan rates for a commercial loan?

If you’re looking for cash flow positive properties, you’re unlikely to find them in the residential sector these days amid sky-high home prices and falling rental yields.

The good news is that you can easily find a high-yielding commercial property that puts money in your pocket rather than draining it like residential properties do these days.

The even better news? You can potentially get a home loan rate when you buy a freehold commercial property.

Lenders are open to negotiating interest rates and the terms of their commercial investment loans depending on the amount you want to borrow and the type of property you want to buy.

So how can you get a great deal on a commercial investment loan?

Commercial investment loan: what you don’t know could cost you

You may not know this but you can actually get commercial interest rates at a comparable level to standard variable home loan rates.

That’s because there is considerably less risk in buying a freehold commercial property than getting finance to kick-start a business or even buying a freehold as a going concern.

If you’re buying a standard commercial property with a reliable tenant and at least a couple years remaining on the lease, you have a strong chance of getting approved.

Huge rate discounts are available

What banks never tell property investors is that their headline rates (for loans under $1 million) are negotiable. But only if you make the deal look safe for them to finance.

Lenders want to avoid risks as much as possible so if you can show that you’re willing to take on some of the risks yourself, you’re likely to get the maximum discount on your home loan.

This can be as simple as doing the following:

• Reducing your Loan to Value Ratio (LVR) by using your residential property as security for the commercial loan.
• Buying a standard property, that is, real estate or land that isn’t purpose-built for a specific commercial use.

What about commercial investment loans upwards of $5 million?

It’s often better to go with a bank bill loan or a Bank Bill Swap Bid Rate (BBSY) facility.

The bank bill facility is linked to the bank’s cost of funds – which is generally at the Reserve Bank of Australia (RBA) official cash rate – and then a margin added on top of that determined by the amount you’re borrowing, your security and the overall risk of your application.

The bank will apply a risk rating, with ‘A’ being the best and a rating of ‘D’ considered a higher risk.

If you can reduce your LVR and you can provide full financials (full doc) that show that you’re in a good asset position with a good repayment history, this can help you get significantly reduced interest rates for larger commercial investment loans.

Call us on 1300 889 743 or complete our free assessment form and discover how can help you qualify for a great deal on your commercial investment loan.

How much can I borrow?

• Borrow up to 100% of the property value if you have a guarantor or sufficient equity in an existing residential property to cover the deposit.
• 80% of the property value for loans up to $1,000,000.
• 75% of the property value for loans up to $2,000,000.
• 70% of the property value for loans up to $5,000,000.
• Commercial property loans from $5,000,000 to $50,000,000 are on a case by case basis.

How do I get my loan approved?

Commercial investment loans are very different to standard residential investment loans.

If you have a large enough deposit or you can secure the property sufficiently, banks don’t generally need to see as much financial information like payslips or your most recent group certificate.

This is great news if you’re self-employed and don’t earn a regular income but it’s important to keep in mind that you have less recourse as a borrower if you’re approved for a commercial investment loan that you can’t afford.

That’s because commercial loans aren’t regulated by the National Consumer Credit Protection Act (NCCP Act).

As a specialised mortgage broker, we can properly assess your situation and recommend the commercial investment loan that’s right for you.

What features are available?

• Variable, fixed and split interest rates available.
• Principal and interest (P&I): Up to 15 or 30 years if you’re securing the loan with a residential property.
• Interest only: Up to 5 years.
• Extra payments: At no cost on a variable commercial rate.
• Offset account: One of our lenders can offer this.
• Low doc solutions
• Lease doc solutions: Max 70% LVR.
• Avoid Lenders Mortgage Insurance (LMI)

What types of property can I buy?

Essentially, a commercial property is any property or land that has been council zoned as commercial, industrial or retail.

• Standard commercial: This includes offices, warehouses and factories.
• Purpose-built commercial: LVRs will be limited and you won’t be able to get reduced interest rates. They include pubs, hotels, child care centres and petrol stations.
• Commercial or residential development: Check out these pages for policy because it differs to commercial investment loans.
• Vacant land: Different policy applies.

You can find more information on the types of commercial property we can help finance on this page.

When can I refinance my loan?

Like a standard residential home loan, you can refinance your commercial investment loan at the end of the fixed period whether you fix for 1, 2, 3 or 5 years.

With a number of major banks and lenders can choose from, we can shop you around and find a great commercial interest rate for you.

Better yet, we can help you access equity in your commercial property (up to 80% of the property value) so you can buy your next commercial property.

We can help you continue to build your commercial property portfolio with competitively-priced commercial loans.

Discover if you can get a commercial investment loan by calling us on 1300 889 743 or by filling in our free assessment form.

Why commercial property trumps residential investments

Commercial properties achieve higher rental income overall compared to residential real estate.

If you choose the right freehold commercial property, you can easily achieve anywhere between 8% and 10% or even up to 20%.

So what should you take into considerations before taking the leap?

What to look for in a commercial property

When choosing the right commercial property, think like a lender. This means staying away from properties that are considered risky.

Here are some of the things you need to check in a commercial property investment.

The lease

Firstly, a tenanted property with at least 1-2 years remaining on the lease is the minimum requirement just to get approved for a commercial investment loan, although, in most cases, 5 years is the minimum.

A lease with 5-10 years remaining is even better!

From a return on investment (ROI) perspective, it means you’re getting reliable rental income for the foreseeable future.

If you decide to sell it in a couple of years time as part of a capital gains strategy, you’ll also be able to continue to attract interested buyers.

For lease terms with less than one year remaining, you’d be hard-pressed to get approved for a loan unless you can show that you’ve renegotiated the lease with the current tenant or you have another tenant signed up.

Standard commercial property

Standard properties like offices and factories appeal to a wider market meaning you’ll be able to attract more potential tenants and buyers.

Banks recognise this as well which is why they’re willing to offer higher LVRs and lower interest rates for these types of properties.

Purpose-built properties like pubs or aged care facilities are designed for a specific industry or commercial use and will only attract business people operating in that particular space.

Vacancy rates fluctuate a lot more when it comes to purpose-built properties: finding a long-term tenant can very tough.

Location

You should consider properties close to main highways and motorways and other infrastructure like public transport.

The reason is that you’re trying to attract business owners who want to be close to a pool of workers and in close proximity to suppliers and distributors.

Surrounding businesses should complement the business to be conducted on the premises.

For example, a retail shop located on a quiet street with no foot traffic isn’t likely to attract many tenants or buyers.

Market changes like this can happen over time such as Parramatta Road in Sydney’s inner west. Today, it’s a dead commercial strip.

The sale price might be enticing but if you notice a lot of vacant stores nearby it’s usually a big red flag that vacancy rates are through the roof.

Once you’ve purchased a suitable property, you can also look for ways to increase your commercial property value to attract potential buyers or tenants.

Why is a tenanted property worth more?

The main reason for this is the way commercial properties are valued.

Valuers use the capitalisation rate as the standard method to work out the average rental income return (which is added to the property valuation).

With an untenanted property, the likely time the property would be vacant and the cost of incentives needed (such as a rent-free period) to attract new tenants is deducted from the overall figure. This would obviously result in a lower valuation.

This doesn’t happen with a tenanted property meaning a higher overall value is placed on these types of properties.

Pros and cons of commercial investment properties

Pros

• Leases usually run for much longer periods than residential properties. Typically, you’re looking at 5-10 years rather than 6 to 12 months which gives you a greater certainty of regular rental income.
• High rental yield means positive cash flow.
• Selling a commercial property with a long-term tenant, who has consistently paid rent on time and has just signed a new lease can be a lot easier to sell than a residential property.
• Commercial properties are generally safer investments compared to shares and bonds.

Cons

• Vacancy periods can be much longer than residential property which represents quite a large risk.
• You’re likely going to attract small to medium businesses (SMEs) rather than larger companies which is also a risk considering 80% of small businesses fail in the first five years.
• There are higher costs of repairs to bring a property up to industry standards and these costs can come frequently depending on the sector. For example, OH&S legislation for child care centres or having appropriate measurements in place to address soil contamination at petrol station sites.
• You typically have to offer a rent-free period (up to 6 months) and a free fit-out to attract potential tenants. However, if you’re able to sign up a long term tenant, these costs often pay for themselves.
• You’re not just at the mercy of the tenancy market but the general state of the economy. For example, many retailers shut up shop when the economy suffers and pubs and clubs suffer when the government introduces harsher noise and alcohol controls.

What should be in the lease agreement?

The most important thing to remember when being a commercial landlord is that you have to be really nice to the tenants.

Business owners don’t like massive changes, particularly businesses that are doing high turnover.

They want to feel secure that they can continue to operate as normal on the premises and that the rent will remain the same.

You should make this known to the tenants by meeting and greeting them.

When it comes to negotiating the lease terms with a tenant, there are a few standards that are completely different to the residential space.

Ultimately, you have to be selling more than just the business premises so you may consider offering:

• Rent-free period: In order to attract new tenants, it’s not uncommon to offer free rent for up to 6 months.
• Free fit-out: This can be negotiated but another incentive many investors employ is to chip in for fit-out costs for a new business. This is on top of the capital works and repairs that are your responsibility as the landlord.
• Determine who pays for what: Sit down with a solicitor and work out who is responsible for upfront and ongoing costs including council rates, water, strata, land tax and ongoing repairs and renovation work. For example, tenants often pay the landlord’s legal fees in the preparation of the lease.
• Lease registered on the property title: This is usually done, giving the tenant more protection.

Lease terms are negotiable but ultimately you’re tied to your tenant, they’re not tied to do.

What if I'm buying an office block?

If you want to invest in office space with multiple tenants, the banks want to see that there is a mix of good tenants (AAA) such as ASX-listed companies, government agencies or multi-nationals.

In situations where some of the tenants are coming to the end of their lease with no plans to renew their lease, a bank will use a weighted average lease expiry (WALE) measurement to determine the risk of buying the property.

For example, if only two out of the ten tenants are coming to the end of their lease, it’s seen as a lower risk and your commercial investment loan will likely get approved.

If half of the leases are about to expire, this would be seen as a much higher risk.

In the past, these type of applications were outright refused by many major lenders but we know a few that now use take a more common sense approach to assessing risk.

Complete our free assessment form if you’re thinking about investing in an office.

Tax and GST benefits

You must be registered for the goods and services tax (GST) when annual gross turnover for the property is $75,000 or more.

By registering, you can actually claim GST back as an ‘input tax credit’ against the GST amount charged.

If you’re required to register for GST and you intend to later sell the property for a profit, it’s essential that you do so.

The reason is that you’ll be charged GST on the sale and will need to pay this amount to the ATO.

The amount of GST you’re required to pay is worked out using the margin scheme method but, typically, it’s 10% of the value of the commercial property.

The cost of GST is usually added to the sale price of the property but you can only do so if you’re registered for GST.

If not, you will have to later make a GST claim with the ATO to reduce your taxable income rather than having the money in your pocket when you sell the property.