In the second of our Truth or Myth blog series we answer the idea that commercial property investment requires a hefty sum of cash to invest – putting the goal out of reach for many.
A quick google search on the subject might support this message, but the truth will always be dependent on individual circumstances. As a general rule of thumb, banks typically look for 50% equity. In some cases, that can simply be sourced from an existing property e.g. a family home (therefore does not have to be cash). But as always, any property acquisition will be subject to the current lending terms, along with due diligence and a valuation of the property in question.
Other points to consider are that a commercial property loan is usually taken across a shorter term than residential property, with terms reviewed annually.
How long it takes to pay down a loan is dependent on (a) the value of loan, and (b) the structure of the loan e.g. principle and interest, versus interest alone. It is not uncommon for a mortgage to extend for over 20 years, and in some cases its actually smarter to hold a little debt. As always, independent advice around debt should always be discussed with your solicitor and accountant. A personal risk assessment (age and stage), your level of available cash, and ability to service the loan, along with your comfort levels with debt – will always be explored.
Interest rates are different to residential lending and in simple terms, are calculated using a base rate plus a margin. The level of risk in the deal is how that margin is determined. The lower the risk – the lower the interest rate. What can lower risk? A robust lease agreement with reliable, long-term tenants, along with a favourable location. All of these factors (and more) are what Viranda investigates on a client’s behalf (before purchasing a property).
Ultimately, the key message from our desk is that investing in commercial property may not be as complicated as you think. We are experiencing strong demand from new investors who have traditionally relied on the residential market. Our team have been acquiring some great value industrial buildings from $600k upwards. So if you are keen to find out whether this lucrative environment is suitable for you, we are just a phone call away.