Commercial Loan Secrets for Investment Properties

By: Aaron Robbins0 comments

As a business owner, the importance of seizing investment opportunities when they arise is not lost on you. One such opportunity might be purchasing an investment property to generate passive income and diversify your portfolio. However, with real estate prices on the rise, this may require financing in the form of a commercial loan.

In this article, we will provide guidance to business owners seeking a commercial loan to buy an investment property.

What are commercial property loans?

Commercial property loans are loans designed to fund the purchase of commercial real estate, and, therefore, typically come with higher loan amounts than standard residential property mortgages. The access to larger loan amounts is one of the main benefits of using commercial loans to purchase investment properties, as they open the window of opportunity wider in the property market than using residential property loans.

How are commercial loans different to residential property loans?

You may be wondering how mortgages for commercial properties vs commercial loans work. Typically, mortgages suit buying properties that are homes, or contain up to four dwelling units, whereas a commercial loan is better suited for larger properties, such as an apartment complex with five or more dwelling units. Commercial loans are also used to purchase other types of commercial properties, such as office space, retail locations, and other properties built for commercial use.

Insider tips for using a commercial loan for investment property purchases

Before you invest in a commercial property, check out these insider secrets:

1. Different properties offer different loan security

When you look to buy commercial property, you’ll inevitably look at a range of property types, from warehouses, factories, multi-residential units or apartment spaces, office or retail spaces. What you may not realise is that the type of property you choose may offer the lender more security for the property loan than others.

For example, if you’re looking at newly built office space that is yet to be tenanted, this is likely to be viewed as a higher-risk investment in the eyes of your commercial loan lender than an existing office space, with an existing lease agreement in place. If you’re a new business or a higher-risk borrower (for example, if you or your business has a poor credit rating), then you may need to provide additional collateral to secure the commercial loan. This could include existing business assets or another property.

2. Specific-purpose spaces may be higher risk

Commercial property investment involves a wide array of potential property types. When looking at a commercial property purchase, there are some higher-risk properties (from a lender’s perspective) than others (as we mentioned above).

For instance, assets including offices and warehouses are seen as “standard commercial properties” because they appeal to a larger pool of tenants, while spaces built for a specific purpose, such as hotels and service stations, are seen as riskier as potential tenants and buyers are limited only to businesses in that sector.

3. Commercial property interest rates can vary greatly

Interest rates for commercial property loans can vary greatly depending on a variety of factors. It’s important to understand how these factors can affect your interest rate to help you choose the right loan for your investment property.

One of the primary factors that can impact your interest rate is the lender you choose. Different lenders may offer different interest rates depending on their risk assessment of your application. For example, banks may offer lower interest rates but require more stringent credit and financial requirements, while private lenders may be more flexible with their lending criteria.

Another factor that can impact your interest rate is your creditworthiness as a borrower. Lenders will typically assess your credit score, debt-to-income ratio, and other financial metrics to determine your risk level as a borrower. If your credit score isn’t as great as it could be, we specialise in finding the right private loan with the best interest rate for your situation.

The type of property you’re purchasing can also impact your interest rate. Some types of commercial properties may be considered riskier investments than others, and lenders may charge higher interest rates to compensate for this risk. For example, a hotel or fuel station may be considered riskier investments than an office building, and may have higher interest rates.

Finally, the loan terms you choose can also impact your interest rate. Longer loan terms may have higher interest rates to compensate for the extended repayment period, while shorter loan terms may have lower interest rates but require larger monthly payments.

How to improve your chances of getting a commercial property loan for an investment property

If you’re looking to invest in a commercial property, securing a commercial property loan is an essential step. However, getting approved for a loan can be challenging, particularly if you’re a first-time investor or have limited experience in commercial real estate. Here are some tips to improve your chances of getting a commercial property loan for an investment property:

  1. Improve your credit score: Your credit score is an important factor that lenders consider when assessing your loan application. To improve your chances of getting approved, aim to maintain a good credit score by paying bills on time, keeping credit card balances low, and avoiding new credit applications. If you have bad credit and no time to work on improving your score, don’t stress; we help many Australians get finance approval with less-than-shining credit scores!
  2. Prepare a business plan: A business plan can demonstrate that you have a clear vision for your investment property and a plan to generate income. Be sure to include detailed financial projections. When helping you find the right commercial property loans, we assess your exit strategy to ensure you’ve got a plan B in the unlikely event that plan A falls through.
  3. Work with an experienced finance specialist: At Diverse Funding Solutions, we can help you navigate the complex world of commercial property loans and can connect you with lenders that specialise in investment properties. We can also help you find the best loan rates and terms for your unique situation.

By taking these steps, you can improve your chances of getting approved for a commercial property loan and set yourself up for success in the world of commercial real estate investment.

Commercial real estate investment vs residential real estate investment

Some of the key differences between investing in residential property versus a commercial investment include:

  • The purchase price. A commercial property’s purchase price is typically significantly higher than residential properties. Your borrowing power could rule out a commercial investment.
  • The Loan-to-Value Ratio (LVR). Generally speaking, the LVR on a loan for a residential property is higher than on a commercial property loan. This means that the lender will typically require a larger down payment for a commercial property loan compared to a residential loan.
  • Loan terms: Commercial property loans typically have shorter repayment terms than residential property loans. The repayment terms for commercial loans are typically between 5 to 20 years, whereas residential loans can have repayment terms of up to 30 years.
  • Interest rates for commercial property loans are generally higher than residential property loans. This is because commercial loans are considered riskier investments than residential loans due to the potential for a higher turnover of tenants and fluctuations in the commercial property market.
  • Rental income: Generally, commercial properties have higher rental income potential than residential properties. Commercial properties are typically leased to businesses that generate higher profits, so they can afford to pay higher rents. However, the location and type of property also play a significant role in determining the rental income potential. Rental returns are one of the major drawcards for property investors to look at commercial investment properties over residential properties.
  • Vacancy rates: Residential properties tend to have lower vacancy rates than commercial properties. This means that residential property owners can rely on a more stable rental income stream. Commercial properties, on the other hand, may have longer vacancy periods between tenants, which can impact the rental income.
  • Maintenance costs: Commercial properties generally have higher maintenance costs than residential properties. This is because commercial properties have higher foot traffic and require more upkeep. Residential properties, on the other hand, have fewer tenants and lower maintenance costs.
  • Lease terms: Commercial leases typically have longer lease terms than residential leases. This means that commercial property owners can enjoy more stable rental income over a longer period of time. Residential leases are generally shorter, which means that rental income can fluctuate more frequently.

Is Diverse Funding Solutions the key to unlocking your commercial property investment success?

Whether you’re buying commercial property for the first time, or making your next addition to your property portfolio, Diverse Funding Solutions can help property investors of every size access the best commercial property loan for their unique set of circumstances.

To work with a specialist private lending broker who will take your full financial situation into consideration, talk with the team at Diverse Funding Solutions. We have access to over 200 of Australia’s top private lenders to get you the best commercial property loan to help you reach your commercial investment objectives.

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