Important Tips to Finance a Commercial Property Investment

A few investors favour commercial properties as they usually generate higher revenue compared to residential properties, apart from other benefits like longer leases. However, many avoid investing in commercial property due to its intricacy and higher risk, particularly looking at ways to finance the asset. Availing of a commercial property loan in Australia and financing a commercial property purchase may seem to be a formidable task for both new and sophisticated investors, and one is prone to feel overburdened. In this article, there are answers to a few of the main questions that commercial property investors have in their minds while applying for a loan. 

Documents Needed to Show While Applying 

Commercial property investors must make an informed decision while seeking a loan. The main consideration while commercial property lenders analyse this type of loan application is whether the property can generate a rental income or not from the tenants as this will be a key parameter in deciding the value of the property. A few of the basic things needed to have approved to get a loan are as follows: 

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1. Your income details, including the rental income from the property  
2. Details of any existing lease, including the duration of the lease agreement 
3. If any deposit and equity from other properties are applicable 
4. If there isn’t any tenant on the property, then you must demonstrate how you can maintain the property and make repayments 
5. Property details, including the asset class (such as office, warehouse or shop), location and valuation. 

Investors have to show details of their financial situation in the last two to three years and their trust deed if their company is established as a trust business structure. 

How Much Can Be Borrowed While Purchasing a Commercial Property? 

Investors purchasing any commercial property can’t borrow as much as those buying residential properties. The particular amount an investor can borrow is often dependent on the property price. For sub-$1 million acquisitions, this can be nearly 80% of the purchase price or estimate. However, for anything more than $1 million, this is usually set at 65%-75% of the purchase price and is generally capped or set by the servicing calculation set by the bank. Moreover, commercial property buyers can’t access lenders’ mortgage insurance. That’s why a sufficient deposit or equity to qualify for the loan is crucial. Nevertheless, there is an opportunity to score approval if you are buying a traditional commercial property, such as an office with a stable tenant that'll be in the space for a few more years. 

Considerations Before Applying for a Loan 

Specialized commercial mortgage brokers in Australia can tell you accurately what you need to know before applying. Moreover, they'll maintain the proper relationships with the main lenders and can suggest lenders according to your situation, as they're aware of the pros and cons of each lender’s various criteria and loan options. As the process differs conceptually from a traditional residential mortgage, it is advisable to initially consult a broker to confirm indicative rates and terms and leverage. You should religiously do this when you’re initially looking at a property. A specialist broker can also help you to negotiate the terms of the loan, particularly on bigger loans. Due to the complexities of a commercial property loan, having legal and financial experts on your side is also necessary to understand the terms of the contracts and lease agreements. Clauses that may impact the underlying property value include termination or break clauses that lets the tenant terminate the lease earlier than agreed.