Understanding Commercial Property Loans in Australia
As the residential investment property market becomes fierce, many investors are starting to recognise commercial property as a viable investment option. Purchasing a commercial zoned property will require a commercial property loan where a residential zoned property requires a residential property loan.
What is Commercial Property?
The term commercial property (also referred to as commercial real estate, investment or income property) refers to building or land intended to generate a profit, either from capital gain or rental income.
What Type of Property is included in Commercial Real Estate?
Commercial real estate is classified as property assets that are primarily used for business purposes. Commercial real estate is commonly divided into the following categories:
1. Office buildings
2. Industrial property
4. Multifamily housing buildings and
5. Farm/Rural land.
In addition to the above, commercial real estate can include specialised securities such as:
- Medical centres
- Shopping Malls
- Self-storage developments
- Child Care Centres
What are the differences between Commercial Property and Residential Property Investments?
When you invest in commercial real estate, you still expect to rent out your property and receive rental income from a tenant as you do when you purchase a residential property investment.
There are some other important differences such as:
- The Tenant is usually called a Lessee
- Vacancies between tenancies can be longer
- Goods and Services Tax applies to commercial real estate (i.e. to the purchase price, rent received and any expenses in relation to the property)
- Maintenance costs are usually paid for by the Lessee, which means net rental income tends to be higher.
What is an Annual Return on Investment?
The “annual return on investment” is the amount earned on the investment property. The amount earned, is expressed as a percentage, and it is called the property’s “yield”.
When investing in commercial real estate. You should always ask yourself the following questions:
1. What return on investment will you get?
2. What is the property’s yield?
How is Commercial Property Yield calculated?
Yield calculations on a Commercial Property are worked out by dividing the annual rental income on the property by how much the property costs to buy. For example:
Gross Yield = annual rental income (weekly rental income x 52) / property value x 100
This is best illustrated by using the following example:
>> Assuming you buy a property for $950,000; and
>> Rent the property out for $2,000 per week ($104,000 annually).
Your Gross Yield will be 10.9%. It will be calculated in the following way:
($104,000/ $950,000) x 100
Truly, having an independent and expert finance broker on your behalf can secure your eligibility for a commercial property loan, not to mention get you the best loan deal that suits your individual needs and objectives.