Beginner's Guide to Commercial Property Finance

Buying a commercial property as your first investment works differently to purchasing a house or apartment.

Commercial property finance focuses on the income the property generates rather than just your personal income. Lenders assess rental returns, lease terms, and the type of tenant occupying the space. If you've only dealt with residential loans before, the assessment process will feel unfamiliar. This guide covers what first-time commercial investors need to know about deposit size, how lenders assess rental income, and why lease documentation matters more than you might expect.

How Commercial Property Loans Differ From Residential Finance

Commercial property loans typically require a larger deposit and assess the property's income-generating capacity alongside your financial position. While a residential lender might approve a loan with a 10% deposit and focus on your salary, commercial property loans generally require 30% to 40% deposit, sometimes less if the property has a strong tenant on a long lease. The loan to value ratio sits lower because commercial properties can be harder to sell and rental income can be more volatile than residential rent.

Consider a buyer purchasing a small office in Clayton. The property is tenanted by an accounting firm on a three-year lease paying $36,000 annually. The lender will assess whether that rental income can service the loan repayments, even if the buyer earns a solid salary from their day job. If the lease expires in six months with no renewal signed, the lender may reduce how much they're willing to lend or require a larger deposit to offset the risk of vacancy.

Deposit and Equity Requirements for Commercial Investment

You'll need at least 30% of the purchase price as a deposit, though some lenders will consider 20% if the property is tenanted and the lease is secure. There's no lenders mortgage insurance available for commercial loans, so if you can't meet the deposit requirement, the application won't proceed. You can use equity from an existing residential property to fund the deposit, but the lender will still assess the commercial property's income separately.

If you're planning to use equity from your home, the lender will want to see that you can service both the residential loan and the new commercial loan. That means your income, combined with the rental income from the commercial property, needs to cover both repayments with a buffer. Lenders typically assess commercial rental income at around 80% of the actual rent to account for vacancies and outgoings.

How Lenders Assess Commercial Rental Income and Lease Terms

Lenders assess commercial rental income by reviewing the lease agreement, not just a rental statement. They want to see how long the lease runs, whether there are options to renew, who the tenant is, and whether the rent is at market rate. A tenant on a five-year lease with two further five-year options is far more appealing than a tenant on a periodic agreement or a lease expiring within 12 months.

If the property is vacant at the time of purchase, most lenders won't approve the loan unless you can provide a signed lease from an incoming tenant. Some will accept a letter of intent, but it's rare. Vacancy introduces too much uncertainty around cash flow, so lenders treat vacant commercial property as a much higher risk.

The type of tenant also influences the assessment. A government department or national retailer is considered lower risk than a startup or sole trader. Lenders don't just want to know the property generates income, they want confidence that income will continue.

Commercial Loan Structure and Repayment Terms

Most commercial property loans are structured with interest-only repayments for an initial period, often up to five years, followed by principal and interest repayments. Loan terms usually range from five to 15 years, which is shorter than the 30-year terms common with residential mortgages. Some lenders offer longer terms depending on the property type and borrower strength, but you should expect to refinance or reassess the loan within 10 years.

Variable and fixed rate options are both available. Fixed rates on commercial loans are less common than in residential lending, and when offered, they typically apply for one to three years. Variable rates give you the flexibility to make extra repayments or pay out the loan early without penalty, which can be useful if you plan to sell the property or refinance as your portfolio grows.

Costs Beyond the Deposit

Commercial property purchases come with higher upfront costs than residential transactions. Stamp duty is calculated differently depending on whether the property is strata commercial or a freestanding building. In Victoria, you'll also need to consider GST, which may apply if the property is sold as a going concern or if the seller is registered for GST. Legal fees are typically higher because commercial contracts are more detailed, and you'll need to budget for a commercial property valuation, which can cost between $2,000 and $5,000 depending on the property type.

You'll also encounter outgoings that don't exist in residential property. These include council rates, land tax, building insurance, and often a share of common area costs if the property is part of a strata scheme. Make sure your cashflow projections account for these ongoing expenses, not just the loan repayment and rental income.

Strata Commercial vs Freestanding Buildings

Strata commercial properties, like a single office or retail unit within a larger complex, are often more accessible for first-time investors due to the lower purchase price. However, lenders can be more cautious with strata commercial because the property's value and appeal are tied to the performance of the wider complex. If other units sit vacant or the building falls into disrepair, your property's value and rental appeal can suffer.

Freestanding buildings offer more control and are generally viewed more favourably by lenders, but they require a much larger deposit and come with full responsibility for building maintenance and insurance. If you're weighing up options, consider not just the purchase price but also your capacity to manage or fund unexpected building costs.

When to Speak to a Broker About Commercial Finance

If you're considering a commercial property as your first investment, speak to a broker who works with commercial lenders before you start making offers. Commercial lending policies vary widely between banks and specialist lenders, and not all lenders will assess every property type. A broker can clarify how much you can borrow, what deposit you'll need, and which lenders are most likely to support the type of property you're targeting.

In our experience, first-time commercial buyers often underestimate how much documentation is required and how long the approval process takes. Getting your financial position reviewed early means you can move quickly when the right property becomes available, and you'll avoid making offers on properties that won't meet lending criteria.

Call one of our team or book an appointment at a time that works for you.

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