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Investing in commercial property

12 Nov 2014

Those contemplating commercial property investment must, if they plan to use bank or other borrowed finance, sort out the arrangement of the loan before they set about looking for a commercial property and making offers.

Banks have much higher demands in place when it comes to financing commercial property: on a commercial property, the total repayment is expected to be completed in ten to twelve years - half the time allowed for a residential property loan.

This is according to Rawson Property Group’s commercial franchise division who says this is lesson that potential investors must take note of.

All too often, says Tony Clarke, Managing Director of the Rawson Property Group, a perfectly good offer will fall through because the buyer has not had sufficient time to raise the required capital. The banks, he says, will in almost every case insist on a great deal of documentation and backup data being provided, and they may well then take their time before making a decision on the loan. This can result, and in some cases has resulted in the seller accepting another offer and a good prospect falling away.

The big difference between a residential and a commercial property, says Clarke, is that on a commercial property, the banks will expect the total repayment to be completed in ten to twelve years - half the time they allow for a residential property loan.

In addition, whereas a bank may well advance 70 to 100 percent on a residential property, on a commercial property they are inclined to be far more cautious and to insist on a far bigger buyer’s deposit - anything from 30 to 80 percent of the purchase price. Furthermore, they will want to see the investor’s business plan and will expect the return on the commercial property to be at least 10 to 12 percent. This, says Clarke, is the accepted norm and there are very few exceptions to it.

These difficulties should not deter people from investing in commercial property, he says. Now, he believes, is an excellent time to be doing just that, because in certain carefully selected industrial nodes, tenant demand now outstrips supply.

“My advice to investors, therefore is to consult with a good commercial agent or franchisee and find out where the high demand areas are - and then to be prepared to possibly pay slightly above the usual market valuation in order to acquire a property that is clearly a good investment. Here in the Rawson Property Group we have clients who own half a dozen or more such properties - and who, having been extremely careful in the selection of their tenants, are now making good money month after month,” says Clarke.

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