Leveraging your home to buy commercial property

When you think of property investment, you probably imagine buying a house or unit and renting it to a nice young family or older couple. Most people don’t think about investing in commercial property.

Buying commercial can be a worthwhile investment. In some ways, renting a property to a business is far less complicated than renting to individuals. If you own a business, you may also want to buy a commercial property for that purpose – it could make more sense to own your own shop or warehouse than to pay rent to a landlord.

Whatever your reasons, getting into commercial property isn’t always easy. You generally need a deposit of 30-50%, which can be a lot for a small business owner. If you’re a homeowner, you could consider leveraging the equity in your home – that means using the value you’ve built up in your home as a deposit on your new commercial property investment.

Why buy commercial?

If you’re a business owner, leasing a shop, workspace or warehouse is usually the easiest option. But, after spending a few years paying rent to a landlord, you might start to feel that owning your own business property might be smarter. Of course, you do have to deal with paying the mortgage, but you’ll be building value over time, rather than paying rent to another person. Just as with owning your own home, owning your own premises means you’re building up value for your business. Another benefit is freedom – if you own your premises, you can customise and change them as you wish, rather than having to ask permission.

Buying a commercial property rather than a residential one has its benefits too. The right commercial properties often deliver owners better returns – and since you’re dealing with business people, you tend to side-step many of the headaches that come with problem tenants in residential property – think all-night parties, pets damaging walls, overcrowding and unpaid rents.

The returns might be better, but getting into commercial property takes a bit more research than just nabbing the brick and tile unit a few streets over. Different kinds of commercial property will have different returns and expenses. Some, like retail spaces, might mean you have to pay for fit-out; some will suffer more wear and tear, like cafés; while others, like warehouses, might not return as much as you expect. It means that your first step will be to research your market carefully before you dive in.

How commercial lending works

Commercial loans and home loans have some key differences. Most lenders will require a larger deposit for a commercial loan. Depending on the property, you may need to front up with as much as 40% of the purchase price. Your loan on a commercial property will be across a shorter term, too. So while your residential property will generally be paid off over 30 years, commercial loan terms are usually between 10–15 years. Commercial interest rates are also higher, calculated on how much risk is involved in the deal. However, if you’re using your home to secure the loan, this ‘de-risks’ things for the bank. It means you get better interest rates, and you can pay a loan off over 20-25 years.

For residential loans, banks will look at your income. For commercial loans, they look at the potential income of the property – that is, what you’ll earn against what it will cost to run the property.

Using your home loan to go commercial

If you’re new to buying commercial property, it might be hard to raise the deposit needed. Small businesses often don’t have access to a huge amount of ready cash, and if you’re just starting out it’s even harder. If you’re buying as an investment property it might be the same story.

For most people, their home is their biggest asset, so why not use it to build your property portfolio? Even if you only had a low deposit when you bought, if you’ve been in your home for several years it’s probably gone up in value. You’ll also have paid off a portion of the mortgage, so the difference between what you still owe and what the property is worth – that is, the equity – could be quite large.

By refinancing and taking on a larger loan, you can access that equity and put it towards the deposit on another property – in this case, a commercial one. Of course, you don’t necessarily want to max out the equity and borrow the entire value of your home, but one or two hundred grand could be enough to get you the perfect commercial property.

What are the risks?

As with any mortgage or loan, there are risks. Increasing your mortgage means your payments will go up, and that could put your home at risk if you can’t continue to pay. If you borrow close to the value of your home and it drops in value, you could end up with a loan worth more than the house. That puts you in a precarious position if you need to sell quickly.

Buying a commercial property also has its risks. If you’re buying for your business and the business fails, you’ll be left with a property to deal with. If you’re buying as an investment, you’ll need to deal with tenants, rents, and taxes – so it really needs to be thought of as a business in itself. Sometimes, smaller and more affordable commercial properties are actually riskier, because they tend to be leased to smaller, less stable businesses.

Make a considered business decision

If you’re thinking of establishing a property portfolio, don’t limit yourself to residential property. Commercial property can offer a higher return and, if you buy it for your own business, can add value to it. You’ll also avoid many of the difficult tenant problems that residential owners face.

There are difficulties and risks, however. Loans for commercial property tend to require higher deposits, shorter terms and higher interest rates. You can get around those by leveraging the equity in your home, but then your home may be at risk.

It pays to weigh up the pros and cons before you leap into the commercial property market, so you can make a considered business decision.

Need help from an expert when it comes to buying commercial property? Talk to Global Finance today.