How to finance your first commercial property

29 December 2020

When it comes to applying to finance your first commercial property loan, there are different options you need to be aware of. Some investors choose to obtain a commercial loan by dealing directly with a bank, while others choose to engage the expertise of a broker to secure the best deal. Before deciding which path to choose, there are some key questions that property investors need to consider.

What type of commercial property do you want? Is it a shop, office, industrial warehouse or something purpose-built such as a childcare centre or a service station? The location of the property is also a key consideration.

Commercial buyers usually look further afield than residential investors. Will the property be regional or metro-based? What cities or towns are you looking at? Other factors to consider include the lease tenure and strength of the tenant, and how much equity you will need to contribute to the purchase.

If you choose to work with a broker, they will want to understand your overall financial position and whether this transaction makes sense, the type of property you’re buying, why you want to buy the property and whether you understand the risks associated with investing in commercial property when compared to residential.

It’s not unusual for a bank to require a valuation to be completed on a property before they assess a loan. Often this is at your cost. Valuation costs for commercial property are a lot higher than residential property. It’s important to prepare a list of questions before you speak to a bank or non-bank commercial lender. This includes ensuring you are directed to the right area/person for your requirements, and to be aware of whether you will need a larger deposit. And would this mean borrowing against additional security?

Here are some pros and cons of applying for commercial finance through a broker or dealing direct with a lender.

Lenders

If you have an existing relationship with a lender, it might be possible to leverage this with a proven repayment history and thorough existing knowledge of your business. However, often the application process can take longer and was often a deterrent because you could be waiting months for approval. Dealing direct with a lender also means less choice and uncertainty about whether you are getting the best deal

Not all banks had commercial property specialists if you just walked in, so it is important to request a face-to-face meeting with a small business specialist. They are the ultimate person who takes the transaction forward and helps a client at the major banks.

It is important not to limit your search. Some of the smaller banks offer longer terms and can be more generous with the amount they can lend you. Some banks may offer you a shorter term to get you a sharper rate but this may mean that you need to re-apply to renew your facility earlier.

A good broker should be across what is available from a number of lenders to ensure you get the best deal.

Brokers

A faster application process and greater negotiating and bargaining power were among the benefits of using a broker to set up your commercial property loan. A good broker will ensure that a lot of the heavy lifting is done for the customer. A broker can also determine what segment your investment fitted into and take you to the correct person within the bank.

Credit appetite and commercial interest rates differ greatly between banks and a good broker should be across what is available from a number of lenders to ensure you get the best solution.

Tips for getting the best deal

The location of your commercial property can play a part in the success of obtaining commercial finance. Consider where the property is located. Rural areas can be viewed as higher risk by some lenders, and others have postcode restrictions meaning they won’t lend in select areas at all.

Ensure you provide as much supporting information regarding your personal financial situation as possible so your broker can present the information to the bank as a “scenario” before formally lodging an application. Look to get an indication of rates, fees and terms based on your circumstances from the bank before lodging an application.

Be wary of how the bank structures your interest rate. Some may charge you interest on the debt you use, but others may want to charge you fees and charges based on the limit of your loan – this may mean that you’re paying for debt you’re not using.

In addition to securing a good commercial property loan interest rate, a broker can also help clients on the servicing of the loan.

You need to consider questions like:

Are you servicing it [the commercial loan] purely on the rent? If it is an investment, some banks don’t like to take on loans with servicing coming purely from the rent. Some lenders like liquidity.
Some lenders, for example, would fund 80 per cent of the purchase price but charge a higher interest rate, so what would the loan-to-value ratio be and what would be the rate that applied?
The most important question is, ‘What is the term that you allow?

Depending on the property, some banks allow 10 years standard. Some are 15 years across their term loans and there are some who will even do 30 years. It’s important to know that a commercial property loan is not like a residential mortgage where you are given a 30-year loan as a starting point if you are under 45 years old. There are additional costs in setting up a commercial property loan too. Unlike mortgages you don’t get packages and your set-up fee is not waived due to competition. You have to pay for valuations, and commercial property valuations run into thousands. They can be anywhere from $900 plus GST to $1500 plus GST depending on the valuer you use and type of property.

Disclaimer: The information provided in this article is intended to be of a general nature only and does not take into account any person’s particular objectives, financial situation or needs. You should always seek professional advice or assistance before making any financial decisions.

Author: Richard Chapman, Nectar Mortgages Brisbane, 0487 004 484