🔑 Key Takeaways
Commercial property loans are finance facilities specifically designed for the purchase, refinance, or renovation of commercial real estate. This includes office buildings, retail shops and shopping centres, warehouses and industrial units, medical and professional suites, hospitality venues, childcare centres, and mixed-use properties that combine commercial and residential elements.
Unlike residential property loans, which are primarily assessed on your personal income and ability to repay, commercial property loans place significant emphasis on the property itself: its location, condition, current and potential rental income, lease terms, and the financial strength of the tenant. A well-tenanted commercial property with a long-term lease to a strong tenant is viewed very differently by lenders than a vacant property or one with a short-term lease to a small business.
Commercial property lending is more complex than residential lending, with more variables, more documentation, and more lender discretion in the assessment process. This complexity is precisely why working with a specialist commercial finance broker is valuable. A broker who understands commercial lending can work through the nuances and match your application to the right lender for your specific property and circumstances.
The differences between commercial and residential property finance are significant and affect everything from deposit requirements to ongoing loan management.
| Feature | Residential Investment Loan | Commercial Property Loan |
|---|---|---|
| Typical LVR | Up to 90% (with LMI) | 65% to 80% |
| Interest Rates | ~6% to 7% | ~6.5% to 9% |
| Loan Term | Up to 30 years | 5 to 25 years |
| Periodic Review | Rarely | Every 3-5 years typical |
| Key Assessment | Personal income focus | Property + tenant + income |
| Typical Yields | 3% to 5% gross | 5% to 8%+ net |
Office space: Standalone office buildings or strata-titled office suites in larger complexes. Lenders generally view office property favourably, particularly in established business districts. The shift toward hybrid working has created opportunities in suburban and regional office markets, including in areas like Geelong and the Surf Coast where businesses are relocating from Melbourne CBD.
Retail: Shops, showrooms, and retail premises. Lender appetite varies significantly depending on the location, tenant profile, and lease terms. A retail shop in a high-traffic strip with a national tenant on a five-year lease is highly financeable. A specialty retailer on a month-to-month lease in a declining shopping centre is much harder to fund.
Industrial and warehouse: This sector has seen strong growth driven by e-commerce, logistics, and manufacturing. Industrial properties typically offer good yields and lower maintenance costs than retail or office. Many lenders favour industrial assets due to their relatively simple construction, versatile use, and strong tenant demand.
Specialised properties: Childcare centres, medical suites, petrol stations, pubs, and accommodation facilities fall into specialised categories that require lenders with specific expertise. Not all lenders will finance these assets, and those that do often apply higher deposit requirements and more detailed assessment criteria. A broker with experience in specialised commercial property is essential for these purchases.
One of the most powerful strategies available to business owners is purchasing their own commercial premises through a self-managed super fund (SMSF). Unlike residential property, an SMSF can purchase commercial property that is leased to a related party, meaning your business can be the tenant of a property owned by your own super fund.
The benefits are significant. The rent your business pays goes into your super fund rather than to an external landlord, building your retirement savings. The rental income within the SMSF is taxed at just 15% (or 0% in pension phase), and any capital gain on eventual sale receives concessional tax treatment. You also gain certainty of tenure: you cannot be evicted from your own premises.
SMSF commercial property loans are available from a range of lenders, though the lending criteria are more stringent than standard commercial loans. Typical requirements include a maximum LVR of 70%, the property must be leased at genuine market rent, the SMSF must have sufficient reserves to meet ongoing costs, and the borrowing must be through a limited recourse borrowing arrangement (LRBA) held in a separate bare trust.
📋 Client Example: SMSF Commercial Purchase in Geelong
An accounting firm in Geelong was paying $48,000 per year in rent for their office space. We helped the two directors establish an SMSF, consolidate their existing super balances, and purchase a $650,000 commercial office suite. The SMSF borrowed $455,000 (70% LVR) with the super balances covering the deposit and purchase costs. The accounting firm now pays $48,000 per year in rent to their own SMSF, which uses the income to service the loan and build the fund balance. Over 15 years, instead of paying $720,000 in rent to a landlord, they will own a property potentially worth over $1 million inside their super fund.
When assessing a commercial property loan, lenders scrutinise the lease arrangements closely. The quality of the lease is often more important than the quality of the building. Key factors lenders evaluate include the remaining lease term (longer is better, ideally three or more years remaining), the financial strength and track record of the tenant, rent review mechanisms (fixed increases, CPI-linked, or market reviews), whether the tenant pays outgoings (rates, insurance, maintenance), any options to renew, and the presence of a personal or director guarantee from the tenant.
A property with a strong tenant on a long lease with annual rent increases is the ideal scenario for commercial lending. The rental income is predictable, growing, and secured by a financially stable occupant. Conversely, a property with a short lease, a weak tenant, or below-market rent will attract more conservative lending terms: lower LVR, higher rates, and potentially additional conditions or covenants.
Vacancy risk: When a commercial property loses its tenant, the vacancy period is typically much longer than residential property. Finding a new commercial tenant can take months or even years depending on the location and property type, during which time you receive no rental income but must continue meeting loan repayments, rates, insurance, and maintenance costs.
Concentration risk: A single commercial property often has a single tenant. If that tenant fails or leaves, your income drops to zero overnight. This contrasts with residential property where vacancy rates are generally low and new tenants are found relatively quickly. Some investors mitigate this by choosing multi-tenanted properties where the loss of one tenant does not eliminate all income.
Capital expenditure: Commercial properties can require significant capital expenditure to attract and retain tenants. A new tenant may require fit-out contributions, and older properties may need major works to meet modern standards for compliance, accessibility, or energy efficiency. These costs can be substantial and should be factored into your investment analysis.
Loan review risk: Unlike most residential loans that run for 30 years without review, commercial loans are typically subject to periodic review every three to five years. At review, the lender reassesses the property value, tenancy, and your financial position. If circumstances have deteriorated (for example, the property has lost its tenant or declined in value), the lender may adjust the terms, increase the rate, or in extreme cases, require partial repayment.
💡 Pro Tip
Always conduct thorough due diligence before purchasing commercial property. This includes obtaining a current building and pest inspection, reviewing the existing lease documentation with a commercial property solicitor, checking for any environmental contamination issues, verifying the property’s zoning and permitted uses, and confirming that the building complies with current fire safety and disability access requirements. The cost of proper due diligence is minimal compared to the financial exposure of a poorly researched purchase.
Applying for a commercial property loan involves more documentation and a longer assessment process than residential lending. Expect the process to take four to eight weeks from application to settlement, compared to two to four weeks for a standard residential loan. Having all documentation ready upfront significantly speeds up the process.
Typical documentation required includes your last two years of personal and business tax returns, current financial statements (profit and loss, balance sheet), six months of business bank statements, a copy of the existing commercial lease (or details of the proposed lease), the contract of sale, a current rental appraisal from a commercial real estate agent, details of all existing assets and liabilities, and your business plan or investment rationale for the purchase.
The lender will order an independent commercial property valuation, which is more detailed (and more expensive) than a residential valuation. A commercial valuation typically costs $2,000 to $5,000 depending on the property’s complexity and value. The valuer assesses the property’s market value, rental value, condition, and suitability as security, and provides a report that includes comparable sales, rental evidence, and an assessment of the local commercial property market.
The entity through which you purchase commercial property has significant implications for tax, asset protection, and future flexibility. Common structures include purchasing in a company name (offering limited liability and a flat 25-30% tax rate), through a discretionary trust (providing flexibility in income distribution and some asset protection), through an SMSF (offering concessional tax rates and retirement planning benefits), or in individual names (simpler but with limited asset protection and higher potential tax rates).
Each structure affects how rental income is taxed, how capital gains are treated upon sale, your level of personal liability if things go wrong, your ability to claim depreciation and other deductions, and the land tax implications in your state. Changing structures after purchase is expensive and can trigger stamp duty and CGT, so getting the structure right before you buy is critical. Consult with your accountant, solicitor, and finance broker before making this decision.
Your loan structure also requires careful consideration. Interest-only periods are more common in commercial lending, with many investors using interest-only terms of five to ten years to maximise cash flow and maintain tax-deductible debt at its highest level. Some lenders offer line-of-credit facilities against commercial property, providing flexible access to equity for business purposes or further investment.
The commercial property market in regional Victoria, particularly in Geelong, Ballarat, Bendigo, and the Surf Coast, has seen significant growth as businesses and workers have decentralised from Melbourne. Remote and hybrid working have driven demand for regional office space, while population growth has supported retail and industrial sectors.
Geelong in particular has benefited from major infrastructure investment, including the Geelong Arts Centre redevelopment, the convention centre, and improved rail connections to Melbourne. These developments have attracted both businesses and investors, supporting commercial property values and rental growth. Industrial property around the Geelong Ring Road corridor has seen especially strong demand from logistics and distribution businesses serving the western Victoria region.
Regional commercial property often offers higher yields than metropolitan equivalents, reflecting both the lower entry price and the additional risk associated with smaller markets and thinner tenant pools. For investors with local knowledge and relationships, regional commercial property can provide excellent returns. The key is understanding the local market dynamics: which areas are growing, which tenants are expanding, and where infrastructure investment is creating new opportunities.
Yes. Some lenders will accept residential property as additional or even primary security for a commercial property loan. This can improve the LVR and interest rate you receive, as residential property is generally valued more conservatively and considered lower risk. However, this cross-collateralisation means your home or investment property is at risk if the commercial venture fails. Discuss the implications carefully with your broker before using residential security for commercial borrowing.
Commercial property typically yields between 5% and 8% net, compared to 3% to 5% gross for residential investment property. The higher yields reflect the additional risks: longer potential vacancy periods, tenant default risk, and capital expenditure requirements. Net yields in commercial property are particularly meaningful because tenants often pay all outgoings (rates, insurance, maintenance), so the rent you receive is closer to your actual return. Industrial properties and regional commercial assets often deliver the highest yields, while premium CBD office space tends to offer lower yields but stronger capital growth prospects.
GST applies to the sale and rental of commercial property, unlike residential property which is generally GST-free. If you are purchasing a commercial property as a going concern (with an existing tenant and lease), the sale may be GST-free under the going concern exemption. Commercial rent is subject to GST, which the tenant pays on top of the base rent. As the property owner, you collect and remit this GST, but can also claim GST credits on your own expenses related to the property. The margin scheme may apply to some sales. Always get specific GST advice from your accountant before purchasing commercial property, as the implications can be significant.
Commercial property can be a good investment, but it is generally better suited to investors with some experience and a solid financial foundation. The higher deposit requirements (20-30%), larger price points, and greater complexity compared to residential property mean it is not typically a first investment. Many successful commercial property investors started with residential investment, built equity and experience, then transitioned into commercial as their portfolio and knowledge grew. If you are considering your first commercial purchase, working with an experienced commercial finance broker and a commercial property solicitor is essential.
Our experienced brokers compare options across 60+ lenders to find the right solution for your situation.
Director & Senior Finance Broker
With years of experience in mortgage broking and finance, Melanie helps clients across Geelong, the Surf Coast, Melbourne and regional Victoria navigate the complexities of home loans and business finance. Contact our team on 03 9020 2699.
