We’re seeing an influx of investors turn to commercial property in the face of buy-to-let margins being squeezed from all directions.
Commercial property is an attractive option given its exemption from the tax changes that hit buy to let and Stamp Duty is capped at 5% over £200,000.
However, there is much more to consider when purchasing commercial property so it is crucial you do your homework and consult a property finance expert like Propp before taking the leap.
Let’s dive into the need-to-knows if you’re thinking of becoming a commercial investor.
Finding a property
Unlike picking up a residential doer-upper, flipping it and letting it out, there is much more you need to be clued up on before proceeding with a commercial property.
You need to understand its asset class, as this will impact:
- How and whether you can finance the purchase
- Whether you need planning permission to make changes to the building or its use.
When deciding whether a commercial property is a viable investment you should consider its location, size, whether it has parking, or if it close to transport links. Familiarise yourself with the local area and think like a tenant if you’re planning to let the property out. If you wanted to rent the property, would it meet your needs.
Getting a Commercial Mortgage
1. How much cash do you need upfront?
A commercial mortgage usually requires a larger deposit than needed for a residential buy to let mortgage. Usually, you’ll need to put at least 25% upfront but this will fluctuate dependent on the asset type you’re purchasing.
As a guide, anything on the high street will set you back 30%-35% but if you’re in the market for a care home or GP surgery you may not need to foot anything up front! Confusing, we know, but that’s why you work with a commercial mortgage expert whose job it is to know.
The LTV (Loan-to-value) will also depend on your level of experience, with commercial mortgage lenders being more flexible if you have a proven track record of commercial property investment or in business.
Whether you plan to purchase the unit and occupy it or let it out will also be a factor that decides the LTV.
2. What does a commercial lender want to know?
Buy to let commercial mortgage
If you’re going to rent out the premises the lender will want to know how much rent tenants currently pay, how long is left on the lease and details of the tenants reliability. Have they managed to keep up with rent? This will be a solid indicator to the lender that the investment is viable. With this in mind, you may struggle to get a commercial buy to let mortgage if you are buying a vacant property that is not already tenanted.
Owner occupier commercial mortgage
The lender will want to understand how long you have been trading and will usually need to review two years worth of finalised accounts and up to date management accounts for the year so they can be confident your business is profitable enough to support the business mortgage. They will also normally ask to see your recent personal and business bank statements and a statement of assets, liabilities, income and expenditure (known as SALIE).You may find it difficult to purchase a commercial property as a start-up.
3. Compare commercial mortgages before committing
Make sure you get the best deal possible by comparing commercial mortgage rates from a range of lenders in the market. Our comparison tool helps you get an idea of which commercial lenders may be interested in your deal and how much it could cost you to borrow.
Our property finance experts will negotiate the lenders on your behalf and get them competing for your business when you use our Optimiser service. They’ll then guide you through the process right the way through to completion.
Get clued up on the lending landscape
Lenders play favourites
In the current climate, commercial lenders prefer to lend on assets like warehouses because the surge in online transactions during the pandemic means storage is in hot demand.
They’ll look upon retail units much less favourably given the struggle retailers face as the highstreet evolves in the face of changing consumer behaviour.
Hospitality venues such as pubs, restaurants and bars are also sitting low on lenders wish lists because of the uncertainty surrounding COVID, but if you know where to look and the proposition is a good one there are still lenders willing to take a look.
Commercial lenders prefer a larger loan, for obvious reasons. They’re more willing to accept the risk that comes with lending if their return is higher. Having said that, high-street banks like Barclays and NatWest are offering smaller loans currently albeit with stricter criteria.
Know your responsibilities as a commercial landlord
Finally, if you’re looking to purchase the property to let, there’s much more you’ll need to be responsible for.
- Gas, fire and electrical safety
- General maintenance and repair
- Minimum energy efficiency standards
- Commercial property insurance
Failure to meet the standards set out in any of these areas can result in hefty fines or even imprisonment.
In short, commercial property is a solid investment but before you’re lured in prematurely by what looks like a great deal – do your homework.