could you buy a commercial property instead of renting it? >>>

It's the dream of many to own their own home, to stop paying rent into the landlord's pocket and to start paying off their own home, but you don't hear the same hype around buying commercial property. Investing in commercial property in Australia can be a viable option. Commercial property can be a great investment and with the current low interest rates, you may find that commercial loan repayments maybe comparable or even better than what you are paying in rent, and you get the advantage of capital growth.

If the building you are renting comes up for sale, then a quick inquiry to the agent or landlord will give you an idea of the asking price and then you can use our online loan repayment calculator to work out a rough repayment amount. Compare the loan repayments to your current lease repayments and if they are close, then it could be worthwhile looking into as an investment. The same approach can be used for other properties you see for sale that suit your business. Contact the agent and ask them for a sale price and also the current lease price. You can then compare the cost to lease V's the cost to buy.

There is other non-financial things to consider as well, such as location flexibility when renting, being able to make modifications to the building if required, or the piece of mind that comes from owning your building and not worrying about the lease expiring.

Deposit

As with any property purchase you need to have enough money for a deposit. Commercial property loans usually start with a minimum deposit of 30% and this deposit can come from a few different sources.

1.     Cash. It is often better to leave cash for other requirements such as running or growing your business.

2.     Equity in property that you own, such as your home or another commercial property. This involves increasing your current property loan to access the required funds. When working out how much equity you have available to use, you need to consider the maximum loan-to-value ratio (LVR) that the lender will allow for a commercial purchase and this is usually 80% for residential property and 70% for commercial property. So if you have a residential property with a value of $1.3M, then the maximum a lender will loan you against the property is $1.3M x 80% = $1,040,00 and if you owe $300k on your mortgage, then you have $1,040,000 - $300k = $740k of available equity to use as deposit or to use to pay for borrowing and purchasing costs.

3.     Funds within a self-managed super fund (SMSF), where you use the savings in the SMSF to pay the deposit. Your SMSF buys the property in this scenario and is able to lease it to your business. This requires close consultation with your accountant/financial advisor to determine if this approach is right for you.  

Commercial Loan

After you have determined where the funds for the deposit are coming from, you will need to find a commercial loan that suits your needs. There are traditional banks, that generally have the lowest rates, but also the strictest requirements and the longest turnaround times, non-bank lenders that have slightly higher rates, but less strict requirements and much quicker turnaround times and private lenders that can offer more complex borrowing structures, have higher rates and quick turnaround times, but generally suit more experienced borrowers with complex needs.

When assessing a commercial loan and your ability to repay it, remember to include any repayments for loans you have used to raise the deposit and then add this to the main commercial loan, to see the total borrowing costs and repayments. The lender will look at your business financials, to determine what impact the loan repayments will have on the business profits and if the business can afford the repayments. If you are simply replacing your current lease cost with an equivalent loan repayment, then this analysis maybe fairly straightforward, but it will still depend on loans the business already has, how much profit is left when including the new repayments and holding costs, and also the consistency of performance over the last couple of years. Different lenders have different requirements, so even though your requirement may not fit one lender, it may fit another, so make sure you shop around or get a finance broker to assist you.