The first steps to commercial property

THE QUESTION

I’ve found a shop currently let at £350 pm with a separate flat above currently vacant, but will bring £300-350.  The asking price is £69k and, although I've had £60k rejected, they'll take £65k.

Firstly is this a good deal? What will it cost me to buy it with commercial finance? What should I expect to pay in monthly payments and are there any fees other than what you would normally have with residential?

THE ANSWER

It’s highly unlikely to get a commercial mortgage at a decent loan-to-value to fund the purchase given that the property is only partially let.  Commercial lenders’ primary concern is how the monthly payment is afforded from day one and you are 50% down on full rental income.

The other issue is that £65k is below most commercial lenders minimum loan of £75k.

Here are some things to consider:

• Is it possible to rent the flat out by the room to increase rental income?
• What business is conducted in the shop, as lenders can be fussy as to what activities go on in the shop?

A more viable strategy will be to buy it cash (yours or someone else's) or with bridging finance, if that is not feasible. You will need to get a tenant for the flat so it is fully let, then look to refinance to a commercial lender to pay off the bridging loan/cash investor (we have often brokered such deals this way).

Due diligence to do prior to committing to purchase would be to engage a commercial surveyor to get an accurate idea of the value they would give it when fully let. You would need to get up to c£100k value on that basis to have much of a choice of commercial lenders.

Things to take into account:

• Depending on the value you may only get lenders with repayment, not interest only options. Rates can vary anywhere between 4%-7%.
• Arrangement fees are typically 1.5%-2.5%.
• The term offered is not automatically 25 years as with residential; it could be 15 years max, but lenders will decide what they are prepared to offer when they underwrite your case.
• Valuation fees are higher for commercial, but then you get a report of around 30 pages (not a 3 page report as with residential).
• Conveyancing may be dearer, check that out with a solicitor.

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