Securing Financing for Your Commercial Property Investment

Obtaining the right financing is a crucial component of successful commercial real estate investing. Expanding your portfolio without a solid grasp of financing options or seeking guidance from qualified experts can be an uphill battle. 

Unlike residential properties, commercial properties require formal third-party valuations considering numerous due diligence factors. Lenders typically lend based on the lower of the valuation or purchase price, though some may accept the contract of sale as a valuation if certain conditions are met.

When pursuing a commercial property acquisition, it's advisable to adopt a lender's mindset. This approach will aid in forecasting, strategising, and identifying opportunities to extract equity through value-adding initiatives.

Lenders continually update their lending criteria but generally favour low-risk, positively geared properties where rental income exceeds loan repayments. They evaluate both the property's quality and the borrower's personal circumstances.

It's crucial to distinguish between "good debt" and "bad debt"

Bad debt includes car loans, credit cards, owner-occupied home loans (which can be investments but are considered liabilities for lending purposes), and debt against depreciating assets.

Good debt is debt secured against appreciating assets like investment properties, collectibles, or other investments.

Financing options may include banks, lending institutions, money partners, joint ventures, or family members. Like negotiating property prices, loan terms can often be negotiated.

There are typically three avenues for obtaining commercial property financing:

1. Using an existing lender

While convenient, this option may not offer the most competitive rates. Consulting a broker can help compare rates and potentially negotiate better terms with your current lender.

2. Investigating independently

This approach requires significant knowledge and time to research each lender's criteria, fees, offers, and conditions. You'll need to submit applications and supporting documents and follow through on the transaction.

3. Engaging a mortgage broker

Mortgage brokers can compare multiple lenders to find the most competitive rates and terms, saving you time and effort while ensuring you know all your options.

The Role of Mortgage Brokers

Mortgage brokers help navigate different loan options and features, assessing your eligibility, interest rates, fees, loan terms, and other criteria across numerous lenders – typically over 20. Since brokers only get paid upon securing a loan for you, they're motivated to find the best deal.

When selecting a broker, ask about their qualifications, experience, number of commercial loans sourced, lender access, decision criteria, and references.

Loan-To-Value Ratio (LVR)

The loan-to-value ratio (LVR) represents the percentage of the purchase price you'll need to cover as a deposit. Commercial property loans generally require larger deposits, typically at least 30% (70% LVR), due to higher associated risks.

For example, a $1 million property with a 70% LVR would require a $300,000 deposit. In addition to the $700,000 loan principal and interest, you'll need funds for stamp duty, legal fees, inspections, and valuations – often around 5% of the purchase price.

While a lower interest rate may be appealing, it could require a higher deposit. Assess where your funds are best allocated based on your goals and requirements. A higher LVR may enable you to borrow more and expand your portfolio faster.

Key Takeaways

Financing your commercial investment doesn't have to be daunting if you understand the different methods and what lenders seek. Thoroughly research and compare financing options to ensure alignment with your goals.

Consider the long-term implications of each financial decision to strategise with clarity and precision from the outset. If unsure about your prospective investment's cash flow, our Commercial Cashflow Interest Rate Stress Test Calculator can provide valuable insights.

If you still feel uncertain or overwhelmed, explore our best-selling commercial property investing book or contact our team for personalised guidance.