With many property investors looking elsewhere as residential buy-to-let becomes less attractive, Gary Hemming of ABC Finance takes a closer look at the merits of investing in commercial property investment.

Get a breakdown on whether it’s a good investment, what you should be looking for in a potential investment and how to fund these properties in 2023.

Why are investors turning their backs on residential buy-to-let?

There are a number of reasons why buy-to-let (BTL) investment has become less attractive in recent years. As property prices have been increasing, yields have been reducing and now average rental yield just 3.53%.

In addition, tax rules have become less favourable for those who own property in their own name rather than through a limited company. So you might opt to buy to let through a limited company.

Finally, the 3% stamp duty surcharge introduced in 2016 has further squeezed the available returns.

How does commercial property investment work?

For those familiar with BTL investment, the concept will be simple. A property is purchased and then let out in return for a rental income.

With commercial property, that rent may be monthly, quarterly or almost any other timeframe that works for both the landlord and tenant.

This will be laid out in the lease agreement. These agreements are usually bespoke, rather than the standard AST (Assured Shorthold Tenancy) agreements used with residential investments.

Leases are usually agreed over longer terms than ASTs, with lease lengths between 3-20 years being commonplace.

What are the pros?

The returns available when investing in commercial property are undoubtedly higher than those on buy-to-let property.

Retail properties average a yield of 5.7%; a £200,000 investment in a retail property would produce £11,400 on average, compared with just ?7,062 from a residential BTL.

“As the leases are much longer, these properties usually have an investment value in excess of their bricks and mortar valuation. This means that you can acquire a vacant property and, if let on a strong lease to a good tenant, you will see an instant increase in value.”

Finally, many leases are fully repairing and insuring, meaning the tenant is fully liable for the repairs and insurance of the property. These leases remove a lot of the cost of maintaining the property and a lot of the effort involved.

This can be a big benefit as residential ASTs require repairs, maintenance and buildings insurance to be handled by the landlord, at their expense.

And the drawbacks?

The commercial property market is less liquid than the residential market. This often means it can be harder to find a tenant when your property falls vacant. As such, it may mean longer void periods for the landlord.

During these void periods, business rates must still be paid, with the responsibility falling on the landlord. If you have a mortgage on the property which must also be paid, it can be a significant drain on cash flow.

Finally, commercial property prices tend to be more volatile than the residential market. Therefore, in times of difficulty in the wider economy, you may struggle to sell your property quickly without taking a more significant hit on the price you receive.

What should I be looking for in a potential investment?

Common sense is the key here. Looking deeply at the market rather than blindly investing is the way to go.

During the first lockdown, many retail businesses saw the government order them to close. In this case, the likelihood of the rent falling into arrears increases as the tenant will have no income.

At the same time, essential retailers such as convenience stores saw their sales sharply increase. This made them a very popular choice for investors as they were seen as ‘pandemic proof’.

Although you can’t always predict the future, you should always stop to assess the potential changes to markets in the future with the aim of making an informed choice.

“There’s no substitute for experience. As such, it’s important that you surround yourself with an experienced professional team who will be able to advise you on market trends.”

A surveyor, a solicitor and a good commercial mortgage broker can be valuable resources when considering a new investment.

How can I fund commercial investment properties?

These properties are funded using commercial mortgages. The commercial equivalent to a buy to let loan is a commercial investment mortgage. Although they work in much the same way, there are some key differences.

Mortgages for commercial property tend to be offered at slightly higher interest rates, especially for first-time commercial property owners.

Secondly, the loan to values tend to be a little lower, with 75% being the absolute limit, but 65% currently being more common.

Finally, commercial mortgage lenders often expect borrowing to be taken on a capital repayment basis. Some lenders will accept interest only, but this isn’t a given.

The post Investing in commercial property in 2023? appeared first on Real Business.

The pandemic has made raising capital a real challenge for many business owners. Although the government’s bounce back and CBILS loan schemes have largely been a success, restrictions have continued for far longer than anticipated by many. As such, we’re witnessing business owners with fixed outgoings struggle for cash flow as their business either faces restricted trade or continued closure.

This guide will break down the pros and cons of borrowing against your business premises, the products available, and how to find the best deal while avoiding common pitfalls.

The pros and cons of securing borrowing against your property

Choosing to secure borrowing against your business premises can be a big step to take. Although unsecured business loans generally come with some commitment in the form of a personal guarantee, the lender does not take a legal charge over a property. There are advantages and disadvantages of each route, and the most appropriate option depends on your current circumstances and what you’re looking to achieve.

Pros

• You’re more likely to be approved for borrowing when securing against your business premises as the lender’s risk is reduced due to the equity in the property.
• Loans can often be arranged over longer terms, which may allow you to borrow more, while still keeping the monthly payments affordable.
• The interest rate charged is likely to be lower than those on unsecured loans.
• Some products will be relatively simple to arrange with little scrutiny of your financial position, with the focus being on the security offered.

Cons

• Secured lending against your property often requires a survey report and additional legal work, which can slow the process down.
• Should you fail to keep up the monthly repayments, your property will be at risk of repossession.
• If your property needs work, it may not be considered suitable security for a loan.

The products available to business owners

When we consider loans secured against your business premises, although the basic principle is the same, there are different products to choose from. Choosing the most suitable type of loan, and then the right product is key to the success of your business.

Secured business loans

Secured business loans work in much the same way as their unsecured counterparts. They allow a business to borrow funds, which are then repaid over a period of time through monthly repayments, usually over a maximum of 7 years. The rates charged are usually lower than those on unsecured business loans, often in the region of 7-10% per year. Applications usually take 2-3 weeks to complete, so although they aren’t as quick as unsecured lending, they do provide relatively quick access to funds.

Commercial mortgages

Commercial mortgages can be taken over a longer period, usually up to a maximum of 25 years, with rates of 2.25-3% per year common. This means that commercial mortgages often come with very low monthly repayments and can be a great option when cashflow is tight. Commercial mortgage lenders usually allow you to borrow a maximum of 75% of the property’s value and will require a first charge. The application process can be difficult to navigate and as such you must be prepared to provide a lot of information as the affordability and other checks can be very detailed. When taking on a new commercial mortgage, you can usually expect your funds in 8-10 weeks.

Bridging finance

Bridging finance is a type of short-term, property-backed loan which is designed to cover an urgent funding need. Bridging loans are usually used to provide access to funding for a period of up to 18 months before the property is either sold or refinanced onto a commercial mortgage. Lenders are generally happy to offer a maximum of 70% of the property’s value and can release funds in as little as a week. The application process is also very simple, with little information required. Where needed, the lender will often allow the interest to roll up on top of the balance, meaning there are no monthly repayments to make. Although these loans can provide crucial funding for business owners, there is a downside. The interest rates charged tend to be much higher than commercial mortgages, usually costing 7.8-12% per year. Bridging loans should generally be used as emergency funds and should not be considered as a long term option.

How to find the best deal

The best deal will depend on the factors that are most important to you and your business. For example, some people see simplicity of the application process as the main driver, others want low interest rates and some want speed of completion. Regardless of the main drivers for you, there are a few steps that you can take to save money. All of these products can be compared by speaking to a reputable fee-free broker, who will be able to compare the options and present the best deals to you. If you don’t want to use a broker, you can compare products yourself by speaking to several lenders. Some brokers charge fees, of course, if you find one that you like you may consider paying for their service. I would advise against paying upfront ‘commitment’ or ‘application’ fees to a broker under any circumstances.

Finally, when comparing products against each other, you should compare the total cost of the loan, rather than just the interest rate charged. This will ensure you’re paying the lowest possible amount back in addition to the amount borrowed. A good broker or your accountant should be able to help you compare products in detail.

The post How To Raise Money Against Your Business Premises During the Pandemic appeared first on Real Business.