Finding the Right Commercial Property Loan

When you're ready to invest in commercial real estate, choosing the appropriate commercial loan is crucial. A smart investment strategy involves determining the most suitable property financing option that aligns with your unique situation.

There are numerous factors to weigh, ranging from interest rates and repayment terms to fees and charges. This article will guide you through comparing different types of commercial property loans offered by various lenders, empowering you to make an informed decision for your investment.

Types of Lenders

When seeking financing for a commercial property, you have a variety of lenders to choose from, each operating differently. Let's explore the three main types of lenders:

1. Major Banks

Most people are familiar with major banks, as they are the most common type of lenders. They offer the advantage of an extensive branch network, although internet banking has made this less important for many. Banks are generally owned by shareholders and are usually listed on the stock exchange.

2. Mutuals

Building societies and credit unions fall under the category of 'mutuals,' which are owned by members rather than shareholders. The key difference between mutuals and banks is that profits are reinvested for the benefit of members, whereas banks' profits solely benefit shareholders.

Members of mutuals own their credit union or building society, while bank customers are not shareholders. As a result, mutual members may benefit from enhanced services, lower interest rates, and reduced fees in some instances.

3. Private Funders

Private lenders are typically groups of wealthy individuals who pool their funds to lend money at premium rates. These lenders often have a higher risk appetite, which generally translates to higher interest rates and establishment fees. However, since their loans are not covered by the National Consumer Credit Protection Act, they can be easier and faster to obtain.

Types of Loans

Structuring the finance for your commercial properties is one of the most crucial aspects of your investment strategy. Commercial loans offer far more variety than residential home loans and are generally repaid over 10 to 20 years. However, the fees attached to commercial property loans can vary significantly, so it's essential to review them carefully before taking on a loan. For example, a lower interest rate may not necessarily be cheaper than a higher rate with lower fees.

Here are some of the most common commercial loans you can choose from:

1. Fixed and Variable Interest Rate Loans

For most loan types, lenders may offer loans with fixed or variable interest rates. A fixed-rate loan allows you to lock in your interest rate for a set period, usually one to five years. During this time, your interest rate will remain the same, regardless of any changes to the official cash rate.

On the other hand, variable rates are much more flexible. Although your interest rate may fluctuate, you'll have access to far more loan features, such as redraw facilities.

2. Split Loans

A split loan combines two components: a portion with a fixed interest rate and another portion with a variable rate. This allows you to manage the risk of interest rate fluctuations during economic uncertainty with the fixed component while taking advantage of potential rate drops with the variable part.

3. Principal and Interest

With principal and interest loans, you gradually reduce the amount you owe by paying off a portion of the principal each month. As a result, your monthly repayments are generally higher.

4. Interest-Only Loans

With interest-only loans, none of the principal amount is paid off during the loan term, usually three to five years. Once the loan term is completed, it will revert to a principal and interest loan unless the property is refinanced.

Interest-only loans are generally the most popular type of loan for commercial property investors because they are more tax-effective and increase a portfolio's cash flow due to lower repayments.

5. Full Documentation Loans

Most lenders will require full documentation loans, which necessitate submitting a myriad of documents to support your application, including details of your income, asset base, outgoings, and debts.

6. No Doc and Low Doc Loans

If you're self-employed, a contractor, or a professional investor, providing all the financial documents to satisfy the lender's requirements can be more challenging. 'No doc' or 'low doc' loans require less information about your assets and liabilities and are slightly more relaxed regarding supporting documentation.

However, to mitigate the risk of granting a loan with little to no financial information, the lender will generally require a higher deposit and charge a higher interest rate.

7. Lease Documentation Loans

Lease documentation loans are excellent for investors with multiple properties and cash flow and are reaching the limit of their loan serviceability. For a lease-doc loan, lenders solely consider the asset and the tenant involved to determine a borrowing amount based on the property's net income.

8. Lines of Credit

A line of credit allows you to use equity from your principal place of residence or investment properties. With a line of credit mortgage, the money you borrow is usually secured against your equity in that property.

It functions similarly to a credit card: you have a pre-approved credit limit and can borrow as much of this as you want, paying interest on the outstanding balance.

9. Refinancing

Refinancing isn't necessarily a type of loan. Instead, it's the process of obtaining a new mortgage to reduce monthly payments, lower your interest rates, take cash for another purchase, or change lenders.

10. Commercial Bill Facility

Generally associated with high-end investment lending, a commercial bill facility allows you to raise the finance you need through negotiable bank bills. Essentially, you agree to pay the face value of the bill by a specified future date. These are relatively complex loans, so you'll need to seek advice from an experienced investor and financial advisor.

11. Vendor Finance

Although not always commonly advertised, vendor finance is quite a common way of obtaining finance for a commercial property. Also known as an "instalment sale," the seller (or vendor) sells the property using an instalment contract. Essentially, the buyer borrows funds from the sellers to purchase the property.

Vendor finance is relatively complex and involves several legal elements. If you're interested in learning more about how this type of property loan works, the author goes into great detail in their book Commercial Property Investing Explained Simply, so be sure to check it out.

Key Takeaways

Understanding the different types of commercial property investment loans available is crucial. Take your time to find the right loan for your situation, as it can significantly impact your success as an investor.

If you would like to know more about how the author has helped thousands of clients successfully source and purchase quality commercial properties across the country, contact us today.