Many property investors start out investing in homes. But, after a while, the more sophisticated investor looks to broaden their portfolio. Here are some of the do’s, don’ts and whys of commercial property investing.
- Diversification – you avoid over-concentrating in the residential sector. Commercial lending can be arranged for many things: shops, offices, cafes, factories, warehouses, car spaces, medical centres.
- Return – commercial property tends to have a higher return. I am currently financing a shop on the Gold Coast at the moment with a rental return of eight percent; average residential property is returning half that at the moment
- Flexibility – banks have more discretion on to whom they can lend. With a residential loan, the banks are black and white – either you have the income to service the loan or you don’t. But with commercial lending, banks will take into account more subjective things like your business plan or whether you have a history in running a business.
- Tax – commercial property offers more tax benefits than residential (but you need to talk to your C&N accountant about this)
Although banks have more discretion in determining commercial loan applications, there are two areas where they tend to be more conservative; rate and amount.
Typically a commercial loan interest rate will be slightly higher than a residential loan and the banks will only lend up to 70 per cent (whereas some banks will lend up to 95 per cent of residential).
That said, the higher return more than makes up for the slightly higher interest rate.
Plus there are times when the banks are particularly aggressive to win business; I had a very engaging conversation with an ANZ business banker who said that over the next couple of months they could lend 100 per cent of the purchase price for specific businesses!
Commercial investing is not for the novice investor. But there are many benefits and Chan & Naylor can hold your hand all the way.
It is important you know what you are doing before you jump in. Talk to your C&N accountant to make sure that you have the correct structure to invest in commercial property (it may be best through a trust or a company).
And, of course, talk to Chan & Naylor Finance on 1300 30 68 68 – my team has access to an army of business bankers that are not available to the public. C&N Finance know where to get you the best deal. Very few brokers know how to arrange commercial finance.