Whether you’re new to property investing, or you’re an experienced veteran, commercial properties come with distinct qualities that can make them an appealing investment option.
But there are a number of differences to be aware of when it comes to commercial property loans. While there may be no shortage of products to choose from, just be mindful that you generally need to put forward a larger deposit than you would with a mortgage, and interest rates are likely to be higher as well.
Want to know more about commercial property investing? Keep reading.
Key Terms of Commercial Property Loans
As we mentioned in our introduction, commercial property loans are not directly comparable to owner-occupier home loans, or investor home loans for that matter.
If you previously invested in a house, or this is your first step into the property investing world, you’ll need to wrap your head around a few key loan differences, although the principles are often the same.
When it comes to choosing a commercial property loan, the Growthfront team is here to support you through the search and application process. We’ll ask you whether you’re investing in the commercial property as a personal investor, or on behalf of a business you might run. This will have a major influence on the type of loan product best for you, and we’ll also gauge whether features like an offset facility or additional repayments are important to you.
Some of the familiar loan types you can choose from include fixed-rate loans, variable rate, split rate, interest-only, or principal and interest.
If you are applying as a business, there is another option we can discuss with you, which is a commercial property line of credit. This works differently than a loan, insofar as like a credit card, you can borrow up to a credit limit, with interest charged only on the funds that have been drawn down.
Because commercial property loans are generally viewed as being more risky than a home loan, lenders generally require a higher deposit (i.e. 30% of the value of the property). Lenders also typically charge a higher interest rate. That means you should more or less forget about the sort of headline-grabbing deals you might see splashed around the internet.
With that said, if you can put some form of security up against the loan, it can go some way towards negotiating a more attractive rate on your commercial property loan.
The Differences Between Commercial and Residential Property
With residential properties, both investment and owner-occupier, GST is generally not payable on the sale or purchase of a property, unless the property in question is a new build. That means existing properties are effectively exempt from GST, regardless of whether you are a buyer or seller.
On the other hand, buyers of commercial properties must factor in 10% GST on the purchase price of the property. An investor may claim this expense in their quarterly business statements as an input tax credit against GST charged on the rent.
In terms of the tenure of a lease, this is often far greater for commercial properties, lasting years, rather than just months. This is designed to provide commercial property owners more visibility over future income, but it is still flexible enough to involve annual rent reviews.
What’s more, yields are often higher for a commercial property than a residential property to offset some of the risk, as a lessee business always has the chance of going bust.
Keep in mind, if you own a commercial property with a layout or features that cater to a specific industry or operation, as opposed to a multi-use property, you may have a harder time leasing it. This is different from residential property as you can generally find a large buyer pool for all sorts of living configurations, be it studios, apartments, multi-bedroom houses, and the like.
Lastly, commercial property owners may be somewhat relieved to learn that a lessee will pay for the costs of maintenance, repairs, and council rates when leasing a commercial property. You should always double check the commercial lease to ensure it identifies each party’s obligations, but this is a far more advantageous break compared with residential property.
In summary, these are the key differences between commercial and residential property:
GST applies to commercial properties
Commercial property leases are generally longer
Commercial properties generally deliver a higher rental yield
Single-use commercial properties are more difficult to lease
Lessees pay for maintenance and repairs
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