According to CoreLogic’s Housing Market and Economic Update, September 2017, the combined capital cities reported a gross rental yield of 3.3% for the period ending August 2017. Indeed, investing in residential real estate is a popular and proven tool for wealth creation. However, despite increasing rental yield across the capital cities, the gross rental yield continues to compress, compelling investors to think about diversifying their investment portfolio.

melbourne commercial property

Commercial property investments offer a lucrative option for savvy property investors with rental yields up to 6% or more (read the CoreLogic report here).

What is commercial property?

Commercial property refers to a host of property options such as retail spaces, offices, warehouses, parking lots and factories.

You don’t need to be in a business to purchase commercial property. While, as a business owner, you can save money on your lease, as a non-business owner, you could lease the premises to a business or government department and earn rental.

There are several advantages of buying a commercial property.

Possibility of Better Rental Yield – Most commercial properties are known to give better rental yield as compared to residential properties, to the tune of 5 percent or above. Of course, the exact profit depends on the location and purpose of the property and the terms of the tenancy agreement.

Longer Lease Term – Residential leases are usually for eleven months. However, most commercial lease agreements are for five to ten years with an option to increase the rent annually.

Tenants Covering Costs – Another area where commercial properties score over residential properties is costs. Unlike residential properties, in the case of a commercial b lease, the tenant is responsible for the costs of insurance, maintenance and repairs.

Choosing a commercial property

More often than not, a well thought out property purchase guarantees high yield. However, if you don’t make the right choice, you could end up in a bog.

Buying a commercial property doesn’t have to be confusing if you take care of the following factors:

Location – As always, location is the prime factor that decides the value of a property. Is the location of the property suitable for your tenant to carry out their business? Are their adequate resources and facilities in the vicinity to support their business?

Lease Duration – It is important to consider the tenancy arrangement while buying a commercial property. If the lease has just started, you do not have to worry about finding a tenant for the next few years.
However, if the ongoing lease is nearing its term, think twice – you would not only have to immediately search for tenants but also get maintenance work done once the lease expires. A property with a stable long-term lease is always a better option.

Nature of Business – Another important factor to understand is the nature of the business carried out by the tenant. Renting out your premises to a government department is obviously less risky than renting to a retail business. Remember, when you are looking to finance your commercial property, your bank will take into account the nature of the business carried out by the tenant while deciding on the interest rate.

Financing your commercial property

The process of securing a commercial property loan is mostly the same as securing a residential loan. However, investors often feel daunted due to lack of information. 

As with a home loan, you can choose a fixed rate or a variable rate, a principal and interest loan or an interest-only loan, and also choose any of the essential features such as having an offset account linked to your loan or the ability to make additional repayments and redraws for free.

Lenders require minimum 30 percent deposit for a commercial property loan. Alternately, you could use the equity in your home to borrow up to 100 percent of the cost. Investors should also know that the interest rates on commercial property loans are usually higher than residential mortgages. While deciding the rate, the lender looks at your LVR, the nature of the commercial property and the terms of the lease. In addition, you would also be required to pay the commercial property valuation fee to the lender when you apply for a loan.

Of course, a knowledgeable broker could guide you to specialist lenders who offer competitive rates on commercial property loans as compared to the Big 4 banks.

“The interest rates on commercial property loans are higher than residential property loans. However, depending on your asset backing, you may be able to secure residential lending rates on a commercial property. Find a good local commercial broker or speak to your accountant,” explains Santino, a mortgage broker with HashChing.

“For those who already have a commercial property loan, it is important to review your home loan and commercial lending interest rates regularly, as there are always lenders offering some attractive interest rates,” says Anthony, another HashChing partner broker.

“I find that people tend not to compare commercial rates. At HashChing, we have a number of commercial lenders on our panel to give our clients a good cross section of lenders and competitive rates,” he adds.

Most lenders use a risk matrix to assess the risk associated with financing a large commercial property. This matrix takes into account, among other things, the location and condition of the property, your repayment capacity and existing investment portfolio, the amount of deposit, the lease duration and the nature of the business of the borrower.
For smaller properties, your repayment capacity, deposit and the loan amount are the main criteria. To understand your position better, get in touch with an expert broker who will help you find the most competitive mortgage rates for your commercial property investment.

By Vidhu Bajaj
HashChing Content Writer

HashChing is helping Australians by providing access to the pre-negotiated home loan deals. Obligation free consultation with one of our partner brokers might save you time, hassle and money.