Commercial Property Loans [Everything you need to know]

Today, we’re going to show you a comprehensive guide to buying commercial property in Australia. So Jayden, how much can I borrow? Is commercial lending so much different to residential lending? What do I need to know here? Just let’s start with the basics. With commercial, it’s actually really determined by… the property price that you’re going to buy — the price of the property. So if you’re buying a property up to a million dollars, the good news is you only need about a 20% deposit. So you can get up to an 80% loan. Now, that’s not across all lenders. Somehow the banks actually need you to have a high deposit but generally speaking, up to a million dollars, you can get away with about a 20% deposit.

The difference is with commercial property over a million dollars, you’re going to need, at least 25% to 30% deposit minimum. In some cases, over $2 or $3 million actually need 35% to 40% which is a huge deposit but the fact is commercial property, that’s the risk. It’s obviously- It’s usually bigger prices, better yields but you need to put in a lot more money upfront. So Jayden, what is a commercial property? Yeah, so a commercial property is pretty much anything that isn’t your standard home. So the banks will consider say, a warehouse, a set of shopping center, a set of shops, a childcare center.

Even if you’ve got more than three residential properties in one address, they’re consider as commercial. So it’s pretty much anything that’s probably related that is in a home that you live in and that’s where the banks find them a bit more restrictive because there’s more risk. Obviously in a home, you’ve got a whole population in Australia that you can bring it out to, where if you own a big commercial warehouse, there’s not going to be as bigger population of people that you can rent out the thing. So that’s why they want you to have more deposit and there’s a lot more restrictions when it comes to lending.

So Jayden, with commercial, I assume if I find the right property, it’s getting enough of a yield, I don’t need to show any of my details? So with commercial, this is a mistake a lot of people make. They think it’s like the old cowboy days, it’s the 1990s where you find a place, you’ve got a deposit, you sign a low-doc forms and on your way. And that’s the case with some small commercial properties but it’s not the case in general. If you’re buying commercial properties and like I said earlier, you’ve only got a 20% deposit, you’re still going to need all your tax returns, your pay slips, all the normal information to be able to get the loans with the cheapest rate and really, the highest leverage. The good thing in commercial is yeah, there are some that do low-doc, which means that you only need to sign a tax declaration or give a pass or even no-doc and lease doc, which is just literally based off the lease. Now, the limitation with that sort of income verification is that it really costs more, basically.

So because it’s more risk to the lender, because if Nathan’s just signing forms and saying, “Yeah, I’m totally making a million dollars a year,” they will price that for more risk and then they actually lend you less, so you have to put more deposit. But in general, commercial is assessed pretty similar to how home loans looked at these days. So Jayden, with the commercial loan, is it as simple as giving a few pay slips, my credit tax returns or what is it that I have to give? Yeah, so it’s actually completely different because with commercial lending, it’s not just about you — the borrower or the sponsor — it’s also about the asset and the person that’s letting that out from you. So for example, if I bought a big masters warehouse a few years ago in our own business, the risk isn’t that warehouse and being able to resell it.

It’s actually about the tenant that’s renting it from me and the income they make. So the bank’s put a lot more emphasis when you’re borrowing on commercial property, about the tenant, what they’re doing in business, how experienced they are, how long your lease is. Commercial leases are very different from residential because instead of getting a lease for six months or 12 months, in commercial, you usually get leases for three, five and 10-year periods with further options to extend that. So I guess in summary, commercial is very different because it doesn’t just look at you, it doesn’t just look at your deposit but it look at the property you find and also, the tenant and lease profile to make sure that that’s safe and secure to the bank to get their money back if something goes wrong. So with commercial lending, I heard that you have to have an annual review, so why is that, Jayden? Why do you need to do an annual review? Yes, so with a lot of banks, they’ll require you to do an annual review every 12 months. So what that involves is they’ll ask you your financials, they’ll ask for a snapshot of your situation, that you’ll getting your own tax returns.

It’s a bit of a pain in the neck, to be honest and every couple of years, they want a new valuation of your commercial property. Now, it is pretty painful, actually because you’ve got to get all that information together over a year, it made you actually do your tax returns and it’s quite frustrating. So the good news is that while most banks say with over $2 million of lending will need annual reviews, there are some small lenders that don’t need that because they’ll actually, instead of looking in a three or five-year loan term, they’ll go up to 20-year loan term on a commercial property. So there are a couple of ways around that. Just because your bank’s pushing it for an annual review, it doesn’t necessarily you need to actually get one. So Jayden, I’ve got a commercial relationship manager who looks after me for all of our lending needs in one of the big banks, why would I go to a broker? Or is there any benefit to keep with my commercial banker? Yes, so I guess, like with residential property, with commercial mortgage brokers, we get to see a lot more of the market and have a lot more options. The other interesting thing with commercial lending and I used to work with a couple of banks, commercial relationship managers don’t get paid on just doing deals. They get paid on the amount of profit that they make for the banks.

So usually, it’s in their interest to charge you a bit extra because it actually goes towards how much their bonuses and how much they get paid. The other thing, too if that commercial bank is getting paid on the profit, they’re not necessarily going to tell you about the better deal that another bank has down the road or another bank can do with lower deposit or in higher gearing and they can kind of get you trapped in there because again, commercial lending, unfortunately is really opaque.

It’s not as open. You can’t just go on Google and search for interest rates and bang, they come up. Because a lot of banks will say, all price are at risk, it depends on the asset and it’s a bit of baloney to be honest. So that’s what the mortgage broker can bring to you. We see these deals every day. We see lots of transactions, a lot of volume. We bring you a lot more options than if you’re going directly to the bank. So that’s it for today, guys. I hope you liked it.