With interest rates on the rise in Australia, hunting down high-quality investment opportunities has never been more important.

While the vast majority of investors will always be drawn to residential property, savvy investors understand just how lucrative commercial property investing can be. With investors on the hunt for yield, and with the ongoing lack of supply of quality assets, demand for commercial property continues to be incredibly high.

For investors getting starting in Commercial Property it’s important to understand that it isn’t necessarily more complicated, it’s just different to buying a residential property. Here are some things you need to know when getting started in the market.

Higher deposits required on Commercial Property

Most residential property buyers would know that it’s very possible to purchase a property with LVRs of up to 90-95%. For commercial property, the reality is that you’re looking at an LVR of 65-75% with some banks potentially offering 80% loans.

This is because commercial property is deemed riskier in their eyes and their loan value ratio (LVR is lower). Where residential property can be purchased with as little as $50,000 as a deposit to cover all necessary costs, commercial on the other hand is $75,000-$100,000 as a minimum.

So what’s the drawcard? High-quality commercial property has the potential to pay itself off in 10 years, compared to the traditional 30 years a residential property might take.

That means all of that money usually going to the bank, after the debt is paid, then goes straight into your pocket, not to mention the fact that it opens up the possibility to leverage equity and purchase a second, third and fourth property. So the decision to pay a higher deposit in the beginning starts paying dividends immediately afterward.

Types of Low Doc Commercial Loans available in Australia

When you purchase a commercial property, unlike residential, you do not come under the same credit laws as Residential property loans. This allows for other options that are not available for Residential Properties.

Types of Loans:

Full Doc Commercial Property Loans: Where all income verification is required similar to a mortgage for a home loan is generally the lowest rate home loan.

Low Doc Commercial Loans: This is where either your Accountants verifies your income or you can use BAS Statements or Business Bank Statements to verify your income. This is only for Self Employed Applicants with registered ABN’s and in Business for 12 months or more.

Lease Doc Commercial Property Loans: Are designed for investors with rental producing commercial properties. The Lease Doc product is where servicing is established by income from a quality third party lease servicing the debt without the necessity to provide financials or tax returns or confirmation of other assets or other liabilities.

Private Commercial Loans: This type of loan is known as an asset lend or no doc loans because the lender is primarily relying on the value and sale ability of the security

Potentially longer vacancies, but, also for longer leases on Commercial Property

When a residential tenant signs a lease, they have a number of ways of getting out of it should they choose to leave. For a commercial tenant, the lease is far more stringent and as a result, it is a huge financial commitment for the tenant.

This is because the success of their business is very much at stake and the property will often play a key role in that success. This coupled with commercial property having increased exposure to economic cycles, and, managing the end of a lease – where you may be required to make repairs or undertake maintenance – all mean that you need to be prepared for longer vacancies if a tenant leaves.

The great news is that if you choose a high-quality commercial asset in high-demand, low-supply areas, you can easily mitigate this risk, as these will always be snapped up by tenants. If you purchase a commercial property in a poor location and the building is in disrepair, then of course the vacancy periods will be longer.

Investors need to carefully assess this relatability potential. Such factors include the quality of the building, the location, rent levels, interest repayments and the state of the general market around it.

Getting the due diligence right will help ensure that the property won’t stay vacant for long.