Helping NZ Businesses By Using A Commercial Mortgage
Helping Businesses By Using A Commercial Mortgage
A lot of businesses have their companies operating in rented premises yet are they overlooking the advantages of owning the building by means of a commercial mortgage? Generally it is a cheaper option to run a business out of rented premises yet there are numerous benefits to buying a property. If commercial property piques your interest, then this article might help you decide on the best way of getting a commercial property mortgage.
The advantages of a commercial mortgage.
When renting a property for business use, obviously you have to allow for the regular payment of the rent. This is easy to build into your cash-flow projections. Moreover rentals keep rising at regular intervals often at pre-agreed rates, like CPI or an agreed inflation amount. These are written into the rental agreements before they are signed.
However, typically the lessee also has to pay for repairs, maintenance and other variable costs. These can play havoc with cash-flow plans.
The rental can be avoided if you have a commercial mortgage on your building.
There is also the added advantage of the property appreciating in value with time, as most real estate does. If you are leasing the premises, the owner gets the benefit of that growth in value of the property. If you are the owner of the building then you are the one who makes that financial gain.
Commercial mortgage gives you a piece of mind that owning a property does. You do not have to base your business on the vagaries of a landlord. This is not a small measure; imagine the costs of relocating if the landlord decides to sell.
The interest that you pay towards the mortgage is tax deductible, making for a more prudent tax planning.
One final major benefit of being a commercial building owner is that if by chance you happen to buy a large enough property that more than houses your business, the vacant premised can be let out to tenants. This brings in additional revenue as rent and spreads your risk. Currently there is a severe shortage of office space in Auckland so the chances of being able to rent out spare space are quite high.
The disadvantage of commercial mortgages
As with any type of loan, a commercial mortgage has its limitations too.
Firstly, most deals have to be started off with a down payment. For a commercial building this is typically 40% of the value of the building as most lenders will only go to a 60% mortgage.
This can be a substantial amount of money to be paid out at a one time. It can be even more stressful if you could use that money to invest in your business. What return could you get from growing your business compared to the saving in rent?
If your business is one that is seeing fast growth, then buying your building may not be a good idea.
This is because of the difficulty, costs and time necessary to dispose of any property but this is magnified when trying to sell a commercial property.
Further, being a landlord comes with the added responsibility of making sure that tenants maintain their premises, carry out regular fit-outs as required by most leases and that of course they pay their rent on time. This may cause an additional burden to a person who already has a business to run.
The costs involved with a commercial mortgage
Due to the risks and the costs involved, a commercial mortgage often carries a higher rate of interest compared to other types of mortgages like a residential home loan. No business can be a guaranteed success, and if your tenants are not able to make the rental payments, you are left to carry that repayment cost to the lender.
The legal costs for buying a commercial building are also much higher than for purchasing a home. You need to factor this into your initial costs. The legal fees associated with the leases though are usually paid for by the tenant.
Who should go for a commercial mortgage?
Seeing as the value of commercial premises rises as the rent increases and the value of the property is improved, it makes an attractive investment to certain types of people.
If you have an established company with strong cash-flow, then you could consider taking out a commercial mortgage to buy the building that you use for your business.
Another ideal opportunity to invest in commercial property by means of a commercial mortgage is if you have a Family Trust which has a strong capital base. It is common in NZ for Trustees of trusts to invest in commercial property to provide both capital growth and a solid rental income.
Obtaining a commercial mortgage
The world of commercial property investment is very different from buying a rental house. For example, the requirements for a commercial mortgage in NZ are much more difficult than a residential mortgage. For one thing, the deposit is usually 40% so you must have a much bigger amount of spare cash you can invest.
You also need to understand how leases work, the notion of Capex, commercial property valuations and many more.
One way to get going is to talk to an Auckland commercial mortgage lender such as Global Pacific Finance. They arrange finance deals of all types including commercial mortgages for investment or property development. If you are thinking of buying the building you operate from or want to get into commercial property investment, give them a call or visit their website to start with.