How to Invest in Commercial Property

Full Doc · Alt Doc · Lease Doc

There are three main documentation types for commercial lending. The less documentation you provide, the higher the rate and the lower the LVR.

How a Commercial Deal Works

The concept is simple: a tenant pays rent, and that rent pays the loan. You don't need personal income to qualify. Here is a real example of how the numbers look on a typical commercial investment.

The tenant pays $95k per year in rent. The loan costs ~$63k per year in interest. The rent covers the loan with a healthy buffer. That is the core of commercial investing.

Why Lease Doc Lending Works

With lease doc lending, the signed lease qualifies the loan. Personal income is not relied on. The property pays for itself. Here is the flow.

Why this is powerful:

1. Personal income is not relied on. The signed lease qualifies the loan. Your tax returns stay in the drawer.
2. Doesn't affect your borrowing capacity. Your residential borrowing power stays untouched for future purchases.
3. Asset protection through SPV. The SPV owns the property. Your personal assets are ring fenced.
4. Scalable. Each property in its own SPV. Each lease qualifies its own loan. Repeat.

Types of Commercial Property

Not all commercial property is the same. Each type comes with different lease structures, tenant profiles, and risk considerations. Here are the four main categories.

The type of property you choose affects your lease terms, vacancy risk, and which lenders will fund the deal. Industrial and retail tend to have the strongest lease structures for lease doc lending.

What is an SPV?

An SPV (Special Purpose Vehicle) is a company or trust set up solely to hold a single property. It separates the asset from your personal name, giving you protection and flexibility.

Why use an SPV:

• Asset protection. If the property fails, your personal assets aren't at risk.
• No borrowing capacity needed. The property's income services the loan. Personal income is not relied on.
• Clean separation. Each property in its own entity. Easy to sell, refinance, or bring in partners.
• Tax flexibility. Distribute income to beneficiaries in the most tax efficient way.

Interest Coverage Ratio (ICR)

The ICR tells the lender whether the property's rent can cover the loan repayments. It is the single most important number in a commercial lending assessment.

Most lenders require a minimum ICR of 1.25x to 1.50x. Sometimes there is a buffer for stress testing, typically 0.5% to 1% above the actual rate. This is much less aggressive than residential lending, where lenders stress test at 2% to 3% above. The higher your ICR, the more comfortable the lender is with the deal.

How to Hold Commercial Property

The entity you use to purchase affects your liability, tax, and flexibility. Here are the four most common structures.

Your Commercial Investment Checklist

Putting it all together. Follow these steps to structure your first commercial investment.

1. Choose your property type. Office, retail, industrial, or specialty. Each has different risk profiles.
2. Set up the right structure. SPV, trust, or company. Get advice before you sign anything.
3. Understand the lending docs required. Full doc, alt doc, or lease doc. This affects your rate and LVR.
4. Make sure the numbers work. ICR of 1.5x+ gives you comfort and keeps lenders happy.
5. Talk to a commercial broker. Multiple lenders, structured for your situation. That's what Lendera does.

Run Your Own Numbers

Use the lease doc deal analyser below to pressure test your own scenario. Enter a purchase price, rental income and see how different deposit levels affect ICR, cashflow and projected returns.