As a property investor you’ve likely experienced the benefits and challenges of owning residential buy-to-let (BTL) properties. With the evolving market dynamics and the potential for higher rental yields, you might be considering expanding your portfolio to include commercial property. But can you get a buy-to-let mortgage for commercial property? This blog will guide you through the essentials of commercial property investment, the types of mortgages available, and the steps involved in securing a commercial buy-to-let mortgage. Additionally, we’ll explore the key differences between commercial and residential buy-to-let investments.
Understanding Commercial Property Investment
Commercial properties refer to buildings or land intended for business activities. Examples include office spaces, retail outlets, industrial units, warehouses, and mixed-use developments. Unlike residential properties, commercial properties are leased out to businesses, which can result in higher rental yields and longer lease terms.
Should I Invest in Commercial Property?
Investors typically target commercial properties for the following upsides:
Higher Rental Yields: Commercial properties often offer higher rental returns compared to residential properties, making them an attractive investment opportunity.
Longer Lease Terms: Commercial leases typically span several years, providing more stability and predictability in rental income.
Diversification: Including commercial properties in your investment portfolio allows for diversification, reducing risks associated with market fluctuations.
Capital Appreciation: Commercial properties in prime locations tend to appreciate in value over time, contributing to long-term capital gains.
Mortgages for Commercial Property
Commercial mortgages are loans designed specifically for purchasing commercial properties. They can be divided into owner-occupied mortgages (for businesses operating from the property) and commercial investment mortgages (for letting out the property to tenants).
A commercial buy to let mortgage is a particular type of loan, where the funds lent are secured against a commercial property. If you plan for your business to trade from the property then you’ll need a commercial mortgage, and if the plan is to let this out to a third party tenant then you’ll need a commercial buy to let mortgage (also know as a commercial investment loan). The mortgage can be used to purchase the property, to refinance an existing mortgage, or to release equity from the property.
Am I Eligible for a Commercial Buy-to-Let Mortgage?
Obtaining a BTL mortgage for commercial properties involves meeting specific eligibility criteria set by lenders. Key factors include:
Property Type and Condition: The property must be suitable for commercial use and meet the lender’s criteria in terms of location, condition, and potential rental income. EPC ratings need to meet the minimum legal standards.
Loan-to-Value (LTV): The LTV for commercial mortgages is generally lower than for residential BTL mortgages, typically around 60-75%. This means you need a larger deposit or equity stake. For stronger sectors, and often via specialist lenders, LTVs of 70-75% would be common. Whereas for more challenging sectors and often via more conservative lenders, then a 60% LTV would be typical.
Experience: Prior experience in property investment, particularly in the commercial sector, can enhance your chances of securing a mortgage. Many lenders would want to see 1-2 years experience as a landlord before considering an applicaton.
How is Commercial Buy-to-Let Different from Residential?
While both commercial and residential buy-to-let investments involve purchasing property to lease out for rental income, there are significant differences between the two. Understanding these differences is crucial for investors considering a transition from residential to commercial property.
Lease Terms
Residential: Residential leases are typically shorter, ranging from six months to a year. Tenants may move frequently, leading to potential periods of vacancy and higher tenant turnover.
Commercial: Commercial leases are usually longer, often spanning several years. This provides more stability and predictability in rental income, reducing the risk of frequent vacancies.
Tenant Profile
Residential: Tenants in residential properties are individuals or families seeking housing.
Commercial: Tenants in commercial properties are businesses. Consideration should be given to the tenant’s experience, financial standing and sector.
Rental Yields
Residential: Rental yields for residential properties are generally lower compared to commercial properties. However, residential properties may experience steady demand, particularly in urban areas with high population density.
Commercial: Commercial properties often offer higher rental yields due to the nature of business leases. Businesses are willing to pay higher rents for prime locations and suitable premises.
Property Management
Residential: Property management for residential BTL involves tasks such as tenant screening, rent collection, and addressing maintenance issues. Landlords may choose to manage the property themselves or hire a property management company.
Commercial: Managing commercial properties can be more complex and may require specialized knowledge. Property management tasks include negotiating lease terms, ensuring compliance with commercial regulations, and maintaining the property to meet business standards.
Financing and Mortgages
Residential: BTL mortgages for residential properties are widely available, with various lenders offering competitive rates and terms. The eligibility criteria for residential BTL mortgages may include income verification, credit checks, and property valuation.
Commercial: Obtaining a BTL mortgage for commercial property is more complex. Lenders have stricter criteria, including a lower LTV ratio and higher costs to arrange. The process involves rigorous property assessments and tenant analysis.
Market Dynamics
Residential: The residential property market is influenced by factors such as population growth, employment rates, and government housing policies. Market trends can vary significantly across different regions.
Commercial: The commercial property market is driven by economic conditions, business growth, and demand for office, retail, and industrial spaces. Market dynamics can be more volatile, with fluctuations in business activity impacting rental demand and property values. Commercial property are often more susceptible to voids.
Starting Out in Commercial Investment
Investing in commercial property through a buy-to-let mortgage can be a lucrative opportunity for UK property investors looking to diversify their portfolios and achieve higher rental yields. While the process may seem daunting, understanding the nuances of commercial mortgages and adhering to a strategic approach can significantly enhance your chances of success. By conducting thorough research, preparing a robust business plan, and working with experienced lenders, you can navigate the complexities of commercial property investment and unlock its potential for long-term growth and profitability.