How lenders size a commercial property investment loan for a business owner: rent to counted income, upfront costs, GST, equity and the risks.
Property Lending Hub
Commercial Investment Loan · Rent and Lease · First Purchase
Most business owners assume a commercial investment loan is sized on their income like a home loan. Usually the tenant's rent carries most of the weight, and the rest of your file decides how much of it the lender counts.
Quick Answer
A commercial property investment loan funds a commercial property you lease to a tenant, and lenders usually size it on the rent that remains after outgoings, the strength and length of the lease and the property's value, with your own income and assets filling any gap. That makes the lease, the interest cover on the net rent and the deposit source the three things to get right before you sign. See how we place commercial property loans for self-employed buyers.
Also called: commercial investment property loan, commercial property investor loan, investment commercial loan. They describe the same product; an SMSF commercial loan is a separate structure with its own rules.
What is a commercial property investment loan?
A commercial property investment loan is a loan secured by a commercial property you lease to someone else rather than occupy yourself. The security might be a small office suite, a warehouse unit, a strip shop or a medical tenancy; what makes it an investment loan is that a tenant's rent, not your own business, is the main source of repayment.
That single difference changes how the file is read. If your own business will trade from the property, the lender reads the business income first. If a tenant will pay rent, the lender reads the lease first. The full comparison sits in our guide to passive versus owner operated commercial property, so here we stay on the investor side.
Major banks, regional banks, non-bank lenders and specialist funders all lend on leased commercial property, and their appetite varies by property type, location, loan size and how much documentation you can provide. For a self-employed buyer, the rent carries most of the weight, but lenders still look at you: your tax position, your existing debts and whether you could cover the loan through a vacancy. If you want a property that runs largely on its own, our guide to freehold passive investment covers what makes a commercial asset low maintenance.
How much of the rent will a lender count?
A lender usually counts only part of the rent: it starts with the gross rent in the lease, takes off the outgoings the landlord carries, and then allows for the chance the property sits empty. Gross rent is not the income a lender counts; the figure that matters is what is left after those adjustments.
How do net and gross leases change the numbers?
Under a net lease the tenant usually pays most outgoings, such as council rates, water, insurance and some maintenance, on top of the rent. Under a gross lease the landlord pays them out of the rent. Two properties with the same headline rent can therefore produce quite different net income, and a lender will typically ask for the lease, the outgoings schedule and the latest rates and insurance notices to work out which it is looking at.
Why do vacancy and lease length matter so much?
A lender also looks at how long the rent is locked in. A tenant with several years left on the lease, options to renew and a trading history behind them supports more borrowing than a tenant whose lease ends next year. Many lenders apply a vacancy allowance or a shading to the rent, and the amount varies by lender and property type. Across several tenancies, lenders often read the weighted lease term; our WALE guide explains that measure.
The counted rent then runs through the lender's servicing test, usually an interest cover ratio, alongside the loan to value ratio on the valuation. Which of those two limits bites first, and what happens when the tenant is weaker than it looks, is covered in our guide on how your tenant sets your LVR. If the property already comes with a lease in place, read buying a commercial property with an existing tenant before you exchange.
What does a commercial investment cost upfront beyond the deposit?
A commercial investment usually costs stamp duty, a valuation, legal and conveyancing fees and lender fees on top of the deposit, and GST can apply to the price unless the sale qualifies as a going concern. Those costs are generally paid in cash or from additional security, because most lenders will not fund them inside the loan.
- Stamp duty. Each state and territory sets its own duty rates and thresholds for commercial property, and the amount on a mid sized purchase is typically a significant share of your upfront cash. Settlement timing can matter too; see our note on commercial stamp duty and the settlement window.
- Valuation. The lender orders a commercial valuation and the buyer usually pays for it. Commercial valuations typically cost more and take longer than residential ones, varying by property and valuer.
- Legal and lender fees. Expect solicitor costs for the contract and the lease review, plus lender establishment fees that vary by lender.
- GST. Commercial property is generally sold with GST on top of the price unless an exemption applies, which changes how much cash you need at settlement even if you can claim it back later.
The exemption most investors meet is the going concern. At the time of writing, the ATO's guidance on selling a going concern says a sale of leased commercial property can be GST-free only when it is for payment, the buyer is registered or required to be registered for GST, and both parties agree in writing that it is a going concern. A fully tenanted building qualifies when the property is sold with all its leases, agreements and covenants; the ATO notes that the sale of a property by itself is not regarded as a going concern. In short, it is a going concern only when everything goes with the building, and your accountant should confirm it before the contract is signed.
How much deposit lenders typically want, and where it can come from, is covered in our insight on the commercial property loan deposit.
Which entity do business owners buy commercial investment property in?
Business owners usually buy commercial investment property in their personal names, a company, a family trust or a self managed super fund, and each one changes how a lender assesses the borrowing and who must guarantee it. The tax and asset protection reasons for choosing one belong with your accountant; what follows is the lending side only.
- Personal names. The simplest file for a lender to read, because the borrower and the income sit in one place. The property and your other assets are not separated.
- A company. Lenders generally lend to a company that owns commercial property, but they usually ask the directors for a director's guarantee, so the personal exposure often remains.
- A family trust. Common for investors, and most lenders will lend to a corporate trustee. Expect the trust deed to be reviewed and the trustee's directors, and sometimes beneficiaries, to give a guarantee.
- An SMSF. A fund can borrow to buy commercial property under a limited recourse arrangement with its own lending rules and a narrower pool of lenders; see our guide to SMSF commercial property loans.
If you are hoping to keep the debt away from your other assets entirely, read how non-recourse commercial loans work before you settle on a structure. The broader question of which name to buy in is also covered in how commercial property loans work.
Can you use equity in your home or business to fund the deposit?
You can usually use equity in your home or another property to fund the deposit and costs on a commercial investment, either by releasing cash against it or by offering it as additional security for the new loan. Both routes are common for a first commercial purchase, and they carry different risks.
Releasing equity means borrowing against your home or another property, through a top-up or a separate loan, and putting the cash into the purchase as your contribution. The commercial loan then stands on its own security. Our glossary entry on equity release explains the mechanics, and our note on commercial property equity release covers the reverse, drawing on a commercial asset you already own.
Offering additional security means the lender takes a mortgage over your home as well as the commercial property, so one loan is secured by both. This is cross collateralisation. It can reduce the cash you need, but it ties the two properties together: selling, refinancing or restructuring either one later usually needs the lender's consent, and a problem with the commercial loan can reach your home.
In deals I've seen, the cleanest outcome is a separate equity release loan on the home and a stand alone loan on the commercial property, because it leaves room to move later. Keep the securities apart where you can, and talk to your broker about the trade off if a lender insists on crossing them. Untangling crossed securities is one of the slower jobs when a client later comes to refinance or buy the next property.
What changes between your first commercial investment and your next?
Your first commercial investment is usually assessed more on you, your deposit source and your personal income, while your next one is assessed more on how the first property has performed and how much equity it now holds. The lender's questions are similar each time, but where the answers come from shifts.
| Question | First commercial purchase | Next commercial purchase |
|---|---|---|
| Where the deposit comes from | Usually savings, business cash or equity in the family home. | Often equity built up in the first commercial property, subject to a fresh valuation. |
| How much your own income matters | Typically more, because there is no track record of you holding commercial property. | Typically less on its own, as lenders also read the rent history of the first property. |
| Security offered | The new property, sometimes with your home as additional security. | The new property, sometimes with the first property, which raises the cross security question again. |
| Entity and guarantees | The structure is chosen now and guarantees are set up for the first time. | Lenders look at the whole group of entities and the guarantees already given. |
| How the lender reads your existing property | Not applicable beyond any home loan and business debts. | Lease status, rent paid on time, arrears and the remaining term on the first property, varies by lender. |
| Lender choice | Often wider, as there is less existing debt to fit around. | Can narrow if the first loan's lender holds cross security or the total exposure is large. |
First purchase: set it up well
- A lease with time left and a tenant with a trading history
- A deposit source you can show clearly
- Stand alone security where you can manage it
- A structure your accountant has signed off
Next purchase: what gets in the way
- Crossed securities from the first deal
- A first property with a lease about to expire
- Rent arrears or a vacancy on the books
- Guarantees spread across several entities
The first commercial purchase sets up the next, so the choices you make on structure, security and lender now decide how easy the second one is. If you are still weighing commercial against residential as an investment, our comparison of commercial versus residential investment property sets out how the two are lent on. When you have a property in mind, you can check your eligibility before you make an offer.
What are the risks of borrowing to buy commercial investment property?
The main risks of borrowing to buy commercial investment property are a long vacancy, a tenant who stops paying, a lower valuation when the loan comes up for refinance, rising interest costs and several leases ending at once. Each one hits the counted rent or the security, which are the two things the loan was sized on.
- Long vacancy. Commercial properties can take longer to re-lease than homes, and incentives to a new tenant can reduce the effective rent for a period. While empty, the repayments come from you.
- Tenant default. A tenant in trouble may fall behind before leaving. What that does to your loan, and how lenders react, is covered in the tenant and LVR guide.
- A lower valuation at refinance. Commercial loans often run on shorter terms than home loans and are revalued at review or refinance. A lower figure can mean the lender asks for a reduction in the loan; see how to refinance a commercial property loan.
- Rate rises. Higher rates reduce interest cover on the same rent. Current pricing ranges are in our note on commercial property loan rates, and they vary by lender and file.
- Lease expiry clustering. If your leases end around the same time as your loan term, the lender may see both risks at once. Spreading lease expiries away from the loan review date gives you more room.
None of these rule out a first commercial investment. They are the reasons lenders size the loan on the net rent rather than the headline rent, and the reasons to keep a cash buffer outside the deal.
A commercial property investment loan is sized mostly on the tenant: the rent left after outgoings, the length and strength of the lease, and the value of the building. Your own income, your deposit source and the entity you buy in fill the gaps. Budget for duty, valuation and fees beyond the deposit, confirm early whether the sale can be a GST-free going concern, and keep your home and the commercial property on separate securities where you can, because how you set up the first purchase decides how easily you can make the next.
Key takeaway: get the lease, the net rent and the deposit source documented before you make an offer, and structure the first deal so it does not block the second.Frequently Asked Questions
Borrowing the full purchase price of a commercial investment property is uncommon, because most lenders want a deposit and the upfront costs to come from somewhere other than the new loan. Some business owners get close by offering additional security, such as equity in a home or another property, alongside the purchase. That reduces the cash needed but ties the properties together, so weigh it against the options in our commercial property deposit insight.
How much banks will lend on a commercial investment property depends on two limits: the loan to value ratio on the valuation, and whether the net rent covers the interest with enough headroom. The lease term, the tenant, the property type and location all move those limits, and they vary by lender. Our note on the 80 LVR commercial property loan shows where the higher end typically sits and what it takes to get there.
GST is usually payable when you buy commercial property, but the purchase of a tenanted commercial property can be GST-free if it qualifies as a going concern. At the time of writing, the ATO requires the sale to be for payment, the buyer to be registered or required to be registered for GST, and both parties to agree in writing, with the property sold together with its leases. Your accountant should confirm this before the contract is signed.
Investors usually buy commercial property in their personal names, a company, a family trust or a self managed super fund, and each structure changes how the loan is assessed and who must guarantee it. Lenders generally lend to companies and corporate trustees with director guarantees, while an SMSF borrows under its own rules with fewer lenders. The tax and asset protection choice belongs with your accountant.
You can usually use equity in your home to buy a commercial property, either by releasing cash through a separate loan on the home or by offering the home as additional security for the commercial loan. Releasing the cash keeps the two properties on separate securities, while offering the home as security ties them together. Our glossary entry on equity release explains how the first route works.
FBAA Accredited
