WHY COMMERCIAL
The commercial property market
can be difficult to navigate, especially for first-time
investors. As a result, many people avoid commercial investment
and
leave it to the “big players”. However, in
recent years commercial investment has become more popular
with
everyday investors, and for good reason.
There are a number of differences between residential investment
and commercial investment, the most significant of which
is that residential property is generally seen as a growth
asset
whereas commercial investment is considered more of an
income asset.
Commercial investment is closely linked to the tenant’s
potential financial outcome of the intended business. The tenant
of a commercial investment property is decisive in your financial
future. You need to be certain about future rental streams
and be prepared if the tenant’s business does not
perform as anticipated. This is why choosing your location
is critical.
Location is The Key
In a well-chosen investment location you should be able
to rent the property with a minimum delay at the conclusion
of a lease or in the event that the tenant’s business
is unsuccessful. However, in an unsuitable location, your
investment
property could stand vacant while you find another tenant.
So, where are the prime locations for a commercial investment
property? Metropolitan areas are highly recommended due to
the ready availability of replacement tenants.
Getting Down to Business
Another difference between residential and commercial
investment is the disparity in loan conditions.
In recognising that
commercial investors are active investors, banks
tend to give loans for
periods of around five years. By that time, the
loan has usually been refinanced and the investor is
looking
at
building on
his or her profile. There are various forms of
loan product. They can be structured to the cash flow
of the business
and can be interest only, fixed, variable, or a
combination
of
fixed and variable.
Cash Flow
A commercial property should yield somewhere between
6.25 and 7.5%, depending on the market, asset
type and location.
If
you have a reasonable Loan-to-Value Ratio (LVR),
this yield should deliver you a monthly cash
surplus.
Interest
Commercial investment loans do not have the option
of mortgage insurance because there is
a maximum amount that a lender
will approve. Generally a lender will look
at financing up to 75%
of the total amount unless the customer
can illustrate the potential for a greater LVR, in which
case
the limit
can be
extended slightly. The rates and pricing
for loans are linked to the LVR. If your LVR is
less than
60 %, the
interest you
pay is your 90-day bank bill swap rate
and
a margin of between 0.9 and 1.1%.
For further information on subjects related
to the commercial property market, or
to have your
questions
answered,
please contact Koala Blue on 1300 733
895 or email us as info@koalabluerealestate.com.au. |
