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Should you be investing in the stock market or in property? Those without experience as a commercial property investor, will have their work cut out. Does this mean it’s never a good time for new investors to make the leap into commercial property? Not necessarily, in fact, the skills acquired as a business owner could transfer well into commercial property. A commercial property can be defined as one from which you make a profit, either from capital gains or rental. This covers everything from buying or renting out a garage, purchasing an apartment or buying a new premises for your business. What you will require is a commercial mortgage and that is probably the hardest part.
Very few business owners have enough cash in reserve to pay for a new property without the need for additional funding. It’s worth noting that the primary difference between a residential mortgage and a commercial mortgage is that a significantly higher deposit is required by the lender. In the case of owner-occupied commercial properties, businesses can usually borrow up to 75% of the value of the property. For buy-to-let mortgages, where the property will be rented on the open market, the amount of property finance which can be accessed will be determined by the estimated rental income receivable. Monthly payments, which can last up to 30 years, are much longer than for a business loan, but shorter-term options are also available through property development finance and bridging loans, which we will speak about now.
If you are building a property from scratch, a property development loan might make sense. That is because it is only used during the build stage of the project. The funds are released throughout the construction process as key milestones have been reached, and agreed upon in advance with contractors. This is a good way to keep the contractor motivated to finish the build as quickly as possible.
A property development loan would not be suitable for a business looking to renovate or expand its business premises unless it was a new build.
Like all other loans, a property development loan starts with an application. You select a lender, and this can be done via a broker or lending platform. The advantage of using a lending platform is you can be sure that all lenders are regulated by the financial conduct authority. Once you have provided all of the necessary details such as the value of the property, development plans and an exit strategy, the lender will provide you with information related to finance and quotes. It’s important to always shop around, as different lenders will have varying interest rates that will apply to your commercial investment. The advantage of using a lending platform is that you will be matched to the lender with the best rates and terms, specific to your business needs.
As you build your property portfolio, there will be times that selling and buying dates don’t match up and you need a loan to cover the purchase of a new property. This is where a bridging loan comes into play. There might also be a need for this type of property funding if you are buying at auction and you don’t have access to the funds by the time the property auction comes around.
Typically when it comes to short-term funding loans in the UK for property acquisitions, a lender will allow you to borrow an amount between £50k and £10m, terms and conditions apply. On average, the most you will be able to receive including interest will be capped at 75% of the loan to value. Bear in mind that the loan will be secured on the property, or across multiple separate properties to spread the risk. In contrast to a property mortgage, a bridging loan is not linked to your income and is repaid in a shorter timeframe than a traditional mortgage.
This is an important consideration for budding property investors. If you purchase a property through a limited company as opposed to as a sole trader you only stand to lose when you put in, and unlike a residential mortgage, you won’t lose any personal assets like the family home. Increasingly, investors are buying properties through limited companies. If you are planning to purchase a buy-to-let, a house in multiple occupation (HMO), or a holiday let, you will need to research whether a limited company is the best way to do it.
One of the benefits of using a limited company to buy property is that you can retain profits within the company and use this income to fund separate purchases without paying income tax. However, income tax will be payable once you draw the profits out of the company.
You can get fixed rate mortgages for a period of time which ensures your monthly repayments do not increase, there are variable rates which can change, and there are even “blended” rates (a mix of the two). This is an important choice, because it determines not only your monthly payment amount, but also how much equity you’ll build up in the purchased property, and how quickly.
Stamp duty land tax is payable on properties that cost £150,000 or more. The amount your business pays is a percentage of the purchase price of the property. Your accountant can best advise with regards to your tax liabilities.
Commercial mortgage interest rates can be fixed against the base rate or the LIBOR (the rate at which banks lend to each other). In addition, lenders will require a cash deposit or additional security which will help offset the risk.
This can be a viable option and the rent can help with your monthly mortgage repayments. Due to its complex nature, it would be recommended to speak to one of our business finance experts to explore this great option – and see if it would suit you.
You will have to pay a small percentage for arrangement and legal fees when you purchase commercial property, so it’s worth speaking to the lender and an intermediary like Funding Options who can explain these terms simply and ensure you know the full cost. It is also worth considering refurbishment costs, with the more organised factoring this into initial costs when selecting their property.