IN MY EXPERIENCE, most seasoned property investors seem to have a good idea of how to structure a home loan and what to look for.
However, the complexities of commercial property and the wide array of commercial loan products mean it can be a little more difficult for commercial investors.
As a result, many get trapped in loan products that are not appropriate to them, which can be very expensive.
What followings will help lay out some steps required to ensure you are making the right decision with your commercial loan product; and, at the same time, avoid the costly mistake of going into a product that doesn’t suit your needs
1. Determine your plan for the property
The right commercial finance option should be consistent with your future investment plans. And therefore, you first need to figure out what you want out of the investment, before looking for the finance solution – rather than the other way around.
Perhaps some questions to ask yourself might include:
- Do you wish to hold your investment for the long term or just for a period before selling?
- Are you an active investor who regularly buys and sells or a passive investor who will look to slowly acquire?
- Are you wanting to be aggressive or conservative?
2. Prioritise your loan requirements
Once you have a good idea what your investment plans are, you can then decide what your main priorities are.
For example: If you are wanting maximise return on equity and have an aggressive growth strategy …having a higher loan to value (LVR) ratio for your investment may be more important, than obtaining the cheapest facility.
Furthermore, if you are looking at a long term hold strategy, a longer loan term may be preferable to a shorter term – even if this means a higher interest rate.
3. Consider Your Circumstances
While you have a wide range of products available, most loan applicants are able to obtain funding – provided they have sufficient equity and the property is acceptable.
Commercial loans are generally priced for risk – which means the riskier the transaction, the higher the pricing.
When you consider your strategy, it is useful to have some awareness as to where you sit in terms of risk profile. If you are pushing the envelope with debt amounts or security type, your priorities need to be more aligned with finding the facility that suits.
On the other side of the coin, if you are a high net-worth investor with a low risk transaction … you may have significant bargaining power to obtain the most attractive terms you can. And it is advisable to make sure you ARE getting the best terms possible.
4. Get the Right Advice
As a commercial property investor, the terms can be a little more complex. So, it is important you have a competent team around you in the area of tax, legal and financial advice.
A commercial credit advisor can assist with tailoring the right loan product and structure to suit your investment goals.
However, it is important your borrowing structure is set up correctly from the start.
Bottom Line: Your financial structure is just like a chain … where any weak links can be very costly. Therefore, it is well worth the time, effort and money to obtain good advice before investing.
Going through the above steps will go a long way towards ensuring that you choose the right commercial loan for you.