Diversify your property portfolio with a commercial property loan
With commercial interest rates being as competitive as they are at present, purchasing commercial property has become a viable option for a lot of property investors. With commercial property returns usually higher than residential property, many investors are returning to the commercial market and a competitive commercial property loan can help improve the return on that investment.
What are the main differences between residential loans and commercial property loans?
Apart from the difference in interest rates, the main difference between residential loans and commercial property loans is the amount of equity required to qualify.
When you purchase a residential property, you can generally borrow up to 95% of the property value, meaning your cash contribution, or “equity” contribution could be as low as 5%. For commercial properties, that equity contribution is at least 25%. This means that if you were to buy a commercial property for $500,000, your required contribution would have to be $125,000. Don’t let this scare you off buying commercial property, if you have real estate assets at the moment, there are always ways to structure the loan to help minimise the amount of cash you are required to put into the purchase.
What other eligibility criteria should I consider when applying for a commercial property loan?
Traditionally when you apply for a home loan, you would ask for a 30 year term. With commercial property the maximum term is 25 years however most lenders will only accommodate a 15 year term. However, there are other types of products available that offer short term finance (2 to 5 years) that can be extended further at maturity.
The other thing to consider is the lease on the property. Most of the major banks will base their loan term on the remaining term of the lease. For example, if you have a 5 year lease on the property you are buying, most lenders will not extend a loan term longer than 5 years. When the lease is renewed by the tenant the lender will then consider extending your loan in line with the new lease. This is why it’s important to find a lender who will make this ongoing process as simple as possible.