Everything you need to know before the deal
Your business is growing, and you need a bigger office – maybe it’s time to buy an office? How to take out a mortgage on the purchase of commercial real estate? Can investing in commercial real estate be attractive? And what are the pros and cons of buying commercial real estate?
Commercial real estate has proven to be an attractive investment in recent years. This is why many businesses have decided to purchase real estate instead of renting. Moreover – it is not as complicated as it sounds, and it is possible to get a mortgage for the property. What are the terms of the mortgage? Details later on.
A mortgage is perceived by most of us as a loan for an apartment, but just as you buy an apartment and receive financing, so do other properties – a store, an office and receive financing. Commercial Real Estate Loan / Commercial Real Estate Mortgage, and in short – “Business Mortgage” is a loan that helps you purchase an office property, and its repayment is usually similar to a mortgage – monthly repayments over an extended period.
The field of business mortgages has grown in parallel with the significant and continuous growth in the last decade, mainly in the office market. The economic growth, along with the growing need of international companies in office space, against the background of the establishment and expansion of development centers in the country, led to the massive construction of offices, especially in the greater Tel Aviv area and in general – throughout the country.
This construction, and without going into the question of market demand and supply and the question of economic viability, has enabled and enabled many businesses as well as individuals to become investors in commercial real estate. Selling according to the customer’s requirement, which means that many businesses can purchase space exactly according to their requirement in a new building. For owners of a property of a size that suits them. Today it sounds obvious, until a few good years ago, it was complex.
Against this background, many businesses of different types – accounting firms, lawyers, various freelancers, small companies, have decided to purchase land. At the same time, investors who have seen the yield in the housing market fall in parallel with the rise in housing prices in recent years, have turned to the office market where the yield is higher. Here, too, one does not have to be a big investor. In fact, it is possible to buy an office with a capital of a few hundred thousand shekels (less usually than what is needed for the apartment), and therefore – many investors have joined the market as investors.
Maybe they will be able to produce an attractive return, maybe not, no one knows how this market will develop in the future. But the vast majority of businesses that buy an office and the vast majority of these investors do so with the help of “business mortgages”.
The rationale of a business mortgage is similar to the rationale of an apartment mortgage. The buyer brings equity and on this capital, given the lien on the property, he receives financing which he repays in monthly repayments over an extended period, although this is usually not a mortgage period for an apartment that can be up to 30 years. This is usually financed for up to 10 years.
Mortgage for office purchase – Who is it for? What is the funding rate? And what is the interest rate?
When you get into the thick of things, you realize that a business mortgage has a number of unique characteristics in relation to loans in the private sector.
Let’s start with the question – who takes out the mortgage?
These are two types of commercial real estate buyers: – Business entities that are interested in using the property or want to rent the property and private entities that are interested in purchasing a property for investment purposes. When it comes to a business that buys commercial real estate, Of these types of buyers.
A business that buys a property can offset the current expenses involved in purchasing the property, including financing expenses. A private investor can not do that. Beyond that, the taxation on a business is different than on an individual. When buying commercial real estate you have to pay a relatively high purchase tax while buying the first apartment has a purchase tax relief.
The difference also exists in the tax on the income from the property. An individual who rents a commercial property has to pay a marginal tax – the income from the rent joins the total income of the property owners and is subject to tax in accordance with his marginal tax. A company/business that purchases a commercial property for the purpose of renting, pays the tax – corporation tax. However, once the business buys the property for its own use – then of course it has no rental income, and beyond that, it can recognize depreciation expenses (beyond the financing expenses on the loan).
It is important to clarify – there are different types of assets and investment options in them as well as different options of investment methods (through a company, partnership, privately). Each different route has different elements of taxation, so long before taking out a business mortgage, one needs to look at it the right way.
By the way, the taxation for an individual on rent from an investment apartment (assuming it is one apartment) is significantly lower (sometimes just zero), while as stated that commercial real estate has a tax (according to marginal tax), but on the other hand – the yield on commercial real estate is higher than About a residential apartment.
Beyond the differences in taxation, there are also differences in the level of financing and interest rates. Most often, banks finance a commercial property at a slightly lower rate than apartments (usually from 50% to 70%). But in recent years there has been a trend of increasing the financing rate – in many cases, it comes from the banks themselves, and in other cases, it comes through the developer who while selling the property also allows for attractive financing that can reach 60% -70% and sometimes more.
Another difference between buying an apartment and buying commercial real estate is expressed in interest rates – the interest rate on a mortgage for buying commercial real estate is higher. An apartment is considered and perceived as a safer property and accordingly the interest rate on a mortgage for a lower apartment, difference depends on many factors but it usually ranges from 1% to 2%.
And yet – the interest rate on commercial real estate financing is relatively cheap financing because there is collateral. So true – it is not mortgage interest, but it is also not current interest for the business and it is also not interesting with certain liens on business assets Commercial real estate serves as a safe.