Types of Commercial Property
As I have already said, there are many types of commercial property. I have listed below the types of properties most commonly available and the amount you will have to provide as a deposit to buy them:
- Retail Shops – 25% deposit
- Offices – 25% deposit
- Industrial Sheds – 35% deposit
- Block of Flats – 30% deposit
- Specialised Security – 35% – 50% deposit
Most people have the biggest issue understanding why a property is a ‘specialised security’. The easiest way to identify one of these properties is to think about why it was built and whether it could easily be changed into something else.
For example, a retail shop can be fitted out to cater for a dress shop or a takeaway business. Also, there are probably more of these types of businesses willing to buy or lease this property.
Let’s take a Hotel as an example of specialised security. The purpose of the building itself is fairly specific. The licenses that go with that property and its operations are also specific and to change the building type and sell it to someone else could take a lot of time and money. Also, the amount of people that have the cash available to buy this type of property could be limited, so it is considered specialised.
Another type of specialised property is a Service Station. Now, some banks will lend up to 80% (20% deposit) on large, well run, profitable operations as an owner occupier – that is, you own the service station business as well as the building. If however you are an investor and do not have another business giving you good profits, you might expect to have to contribute between 35% and 50% of the purchase price.
As an investor, you will be relying on the tenant paying their rent and so is the bank. As such, they have no way of knowing if the current tenant is operating a profitable business and will continue to pay. If they don’t pay their rent and you default on your loan, it may be a very difficult type of property to sell and so you need to put in more deposit.
So, when thinking about buying a commercial property, the rule of thumb is that the more specialised the purpose of the building, the more deposit you will have to contribute.
There are a few more things to consider with Commercial Property. The first is what loan type should I use to buy it? – via a Low Documentation Loan (commonly called Lo-Doc), a No Documentation Loan (No-Doc) or a Fully Documented Loan (Full Doc). Banks and non-banks offer these types of facilities and the pricing of fees and interest rates will vary greatly for each type of loan.
The second consideration is just that – what is my interest rate and how do they work it out?
I’ve covered both of these on the next page, feel free to post your comments regarding your experiences with buying commercial property. Questions welcomed as well!!!!