Self-employed? 3 tips for investing in your business
If you’re thinking of investing in your business, the current low interest-rate environment could be an opportune time to do so.
Many businesses, especially when they are starting up, rent the premises they operate out of. However, it could be more cost effective and beneficial over time to buy.
Do the maths
You will typically pay less in interest on a commercial loan than you would on commercial rent. You may also benefit from capital growth on the property over time, however bear in mind that commercial property values do not necessarily follow residential growth.
Conversely, if you need to rent out your premises in future, you could benefit from higher rental returns than on a residential investment.
Research the cost of repayments on a commercial property loan, to see how it all stacks up. Bear in mind, your repayments may be higher than for a residential property of the same value, as commercial mortgage terms are usually shorter – around 15-20 years compared to 25-30 years for residential. However, you will also be paying off the debt sooner.
Consider any upfront costs
Before you go ahead with a commercial property investment, consider the upfront costs.
The deposit required on a commercial property is typically higher than for a residential investment – around 25% to 30% of the property value.
However, if you don’t have a large enough deposit, then there may be the possibility of using your residential property as equity. Your accountant or financial adviser will be able to help you assess the options available to you.
The commercial loan approval process usually allows for more leeway than residential applications, with lenders being more flexible in assessing business revenue when compared to home loans. But be prepared for greater scrutiny, as a result.
Make sure you budget your loan request appropriately, and can demonstrate why you need the amount you are asking for.
Lenders will want your financial statements, from which they’ll make reasonable assumptions, and they want to see you have business acumen. The amount you are asking for needs to be justified. Ask for too much, or too little, and this could raise questions for the lender.
Finally consider the property ownership structure. Your accountant may advise you to create a new entity (company/trust) to purchase the property; make sure you have spoken to them and agreed a structure before you approach the bank.
John Kolyvas, National Partnership Manager, Commercial at ING DIRECT Australia.
Naritas is an accredited introducer partner for ING DIRECT commercial loans. To get started with an ING DIRECT commercial loan using Naritas, click here.