Article at a glance:
- Investing in the commercial property market is a significant investment for buyers and tenants.
- Financing options like bank loans, CMBS, private equity, and crowdfunding can help investors to raise capital to finance commercial property investments.
Commercial real estate investments, large or small, involve significant capital. Whether leasing or buying commercial real estate in Australia, investors need a robust financing term to back the endeavour. Commercial properties come more expensive than residential properties, and to make the financing comfortable for buyers or tenants, various kinds of debts are in place to finance commercial property. Here we discuss some of the best ways to finance commercial property investments in Australia, so every potential buyer or tenant can invest in commercial properties they deem necessary for their business plans.
Traditional Bank Loans
Most commercial real estate investor default to bank loans to back their investment. So, banking loans are a common way to finance commercial property investments. These loans typically have fixed or variable interest rates and can be used to purchase or refinance commercial property. However, these loans may require a significant down payment and can be difficult to obtain for those without strong credit and financial history.
Commercial Mortgage-Backed Securities (CMBS)
CMBS are securities that are backed by commercial real estate mortgages. They are typically issued by investment banks and sold to investors. CMBS can provide a higher yield than traditional bank loans, but they are riskier and may have less favourable terms. In Australia, there are two types of CMBS; pass-thorough and collateralized obligations. Income-generating properties are highly valued for CMBS, such as retail properties, industrial properties, and hospitality buildings.
Private equity firms can provide financing for commercial property investments. This type of financing typically involves the investor taking an ownership stake in the property in exchange for providing capital. Private equity financing can be a good option for those who want to avoid traditional financing or need a significant amount of money quickly.
Mezzanine financing is a hybrid form of financing that combines debt and equity. It is typically used when traditional bank loans and equity financing are insufficient to finance a commercial property investment. Mezzanine financing can provide a higher return than conventional bank loans but also carries more risk. In mezzanine financing, investors may lose control of the business if the equity portion of the loan is high enough to give the lender a larger share than the investor. But, one strong point of mezzanine financing is the repayment terms are flexible compared to traditional financing options like bank loans.
Crowdfunding platforms allow multiple investors to pool their money to fund a commercial property investment. This can be a good option for those who want to invest in commercial property but need more capital. However, crowdfunding investments can be riskier than traditional financing options because crowdfunded investments are mostly illiquid and may take years to be sold.
Investors can use several financing options to back their commercial property investment. But you have to be careful while finalizing the right choice for you. As an investor investing in a big commercial real estate market in Australia, you have to weigh every available financing option carefully to avoid any future financial worries regarding interest rates and repayments. Unlike family home loans or residential loans, commercial real estate loans are usually particular to a borrower or a specific deal, so it is important to understand every loan dynamic before finalizing it.