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Commercial real estate financing is very different from home financing. In the latter, the transaction is based on the value of the home at the time of the sale. When taking financing for your commercial property purchase, however, financial institutions will base it, in part, on the value of the business in the future. In addition, commercial real estate financing can take on very different terms. The way the deals are structured is based on a number of factors such as:
- Anticipated use of the property:
- Anticipated returns from the property;
- Type of real estate;
- Size of real estate;
- Perceived risk to lender;
- Market conditions.
Prior to taking up a loan, investors need to do their due diligence by examining each of these areas carefully. Investors then need to examine the type of loans offered by lenders in accordance with their needs and anticipated growth.
There are many ways to finance your property purchase, be it from mortgage banking firms, savings and loan institutions, regional banks, insurance companies, and private investors. It is not advisable to pay 100 percent for your commercial real estate purchase. In the current economic climate, you can get up to 75 percent financing.
Different banks provide different packages to suit your needs. Banks like HSBC, for instance, has an Investment Property Loan programme which provides a comprehensive and attractively priced property-financing package for individuals buying commercial properties for investment purposes. Their loan programme includes attractive interest rates, flexible terms to tailor your loan to suit your individual needs, high upfront legal fee subsidy, free fire insurance for one year and free valuation. Not all banks, however, readily post this information online. Therefore, investors will need to do their own market research by enquiring personally with the banks on whether their financing packages are viable for the long-term.
Most banks have a list of requirements when it comes to financing income-producing properties such as a shopping mall, office building or commercial warehouses. In general, here are the requirements:
1) Banks will usually not finance more than 75 percent of the appraised value of the property.
2) Properties must show sufficient debt-repayment ability by way of a ratio of 1:20X or higher. Debt Repayment Ratio is calculated as Net Operating Income / Total Annual Debt Burden.
3) In the case that a sole tenant occupies the property financed, investors might want to take a look at the financial strength of the tenant.
Although there are many types of financing available, investors should assess their level of risk. Ask yourself, can you afford the property? What is your cash position like? Are you looking to just pay 25 percent first and take a bank loan for the remaining 75 percent? Will you have sufficient cash to buffer yourself during an economic downturn? Can you afford the fluctuating bank interest rates? Going through all the possible commercial factors will help you eliminate your risks and anticipate any shocks in the market. The following documentation must be ready prior to taking up a loan:
* Income and expense statement for the property demonstrating a solid income stream;
* Financial statements on all principals involved as owners of the property;
* Profiles of the management team;
* Property appraisal;
* Financial statements on the borrowing entity;
* Plans, including construction blueprints (if available) for the use of the property.
Commercial and Industrial Property Loans
Are you expanding your business operations? Or are you thinking of investing in the commercial & industrial property sector? Let us help you maximize your profits by securing the lowest loan deals in town. Enjoy higher savings and higher profits now.
Buying under Company or Individual name?
When you purchase a commercial or industrial property under company name, the company’s financials are used as a basis of assessing your loan approvals. However, if your company is new, or if it is incorporated to solely hold your properties, the individual directors’ income and other financial commitments will be assessed just as how the individual purchaser is qualified.
How much loan will I be eligible for?
If you are purchasing the property for your own business use, usually most banks will be able to grant up to 80% quantum of financing. On the other hand, if the purpose of purchase is for investment, the maximum financing will be capped at 70% for most banks. However, there are others that might be able to stretch it up to 80%. Speak to us today to understand more by filling up your details on the enquiry form.
How is the maximum loan period I can borrow?
There are a few qualifying criteria we have to look into. They are:
Some banks capped the maximum age of borrowers to 70 years old after the loan while few others allow up to 75 years old. If the purchase was made for own business use, a maximum of 30 years loan can be granted while 25 years loan are considered for investment properties. As each bank has their own requirements for each of the criteria mentioned above, it is best to speak to our mortgage consultants to get a clearer picture on this.
Residential vs Commercial Property Loan Interest Rates
Residential property interest rates are generally lower than that of a commercial property. There are many reasons attributing to this. But more commonly, this is due to the risk factor that the different property purchases pose. Commercial property is bought mainly for the use of business operations or for investments. Granting a loan to a new company or a company with very little assets can be especially risky for the banks in the event of a default or failing business. Hence, the higher risk the bank sees the loan, the higher the interest charged. That being said, our consultants are equipped with a extensive list of packages to help you source for the lowest rate in town. Contact us to receive these rates now!
Last updated by Geoffery Ho Apr 16, 2013.