Real estate was just limited to residential peripherals, proptech, growing economy, and modern revolution have changed the equation. Now, commercial real estate is at the forefront with many opportunities for its investors.
While talking about the fast-paced growing commercial real estate of the country, the commercial real estate sector is expected to grow at a CAGR of 13% during the forecast period (2022-2027). Moreover, due to the increase in repo rates, inflation is at its peak. The possibility is that the traditional investment classes like FDs and bonds would be irrelevant in the future. At such times, real estate is the only investment class to give a hedge over inflation. If you are somebody planning to invest in commercial real estate properties or double your assets through commercial property loans, this blog will be of great help!
What is a commercial property loan?
Commercial loans provide flexibility to invest in commercial properties or any other assets that are non-commercial. However, commercial loans are different from home loans and personal loans. They can be utilized to build leverage. Let’s imagine a person named ‘Loanly’. He takes a loan of Rs. 1 lac for his commercial property at an interest rate of 6%. Now, the EMI of the debt was Rs.60,000.
Loanly’s monthly rental income was Rs. 70000. He was smart and paid his EMIs through the rental income every month without fail! Plus, he saved an extra Rs.10,000 in his hand. The annual rental yield of commercial property usually falls between 9%-12%. Do you remember the interest rate? Yes! It was 6%. So, Mr. Lonely who was smart at managing loans built leverage through commercial loans!
Now, if this has grabbed enough of your interest, then let’s dive deeper into the types of commercial loans.
A. Loan against commercial property
The loan against a commercial property is used to purchase another commercial property, business assets, or any other profit-generating purpose by mortgaging a commercial property you own. You can opt for a commercial property loan in case you are looking for ample, affordable financing, for instance, to expand your business or buy expensive machinery.
Benefits of loan against commercial property
a. Lower interest rates- The commercial mortgages are very secured in nature, as you have a steady business inflow. As compared to educational and personal loans, there is less surety of regular repayments, commercial mortgages are trusted by the banks and hence these loans come with less interest rates.
b. Easy application process- Unlike other types of loans that require endless paperwork to apply for, commercial loans have a simpler application process.
c. Easy back-off- If you are not able to pay the debt in a worst-case scenario, you can rent your property and pay the debt from the generated rent or sell the property according to the capital appreciation which is mostly high in the case of commercial properties. You can then pay the entire loan amount and invest the remaining amount in a residential property within 2 years saving on tax under section 54F.
Eligibility criteria for loan against commercial property
-Age limit- Any person under the age of 50 can avail of this loan.
-Employment status- Any salaried, non-salaried, self-employed or non-professional person is eligible for this loan.
-Interest rate- The rate of interest charged on commercial loans in India is 10.25%-11.10%
-Borrowing limit- 70% of the loan amount can be borrowed out of the total property purchase price.
-Loan repayment tenure- The maximum loan repayment period is 15 years. A minimum of 30% of the property amount must be contributed by the borrower, including stamp duty and registration. This loan is also open to partnership firms and corporate bodies that have been in operation for less than three years.
B. Lease rental discounting
LRD or Lease Rental Discounting is the loan taken against rental receipts of your pre-leased commercial property. The loan EMIs are paid by the tenants through rental income of the commercial property without you having to pay it yourself. LRDs can be used to expand the business, buy assets be it personal or commercial, or invest in commercial/residential property through the loan amount.
Take the example of Mr. Loanly given above. He was paying his Rs. 60000 EMI from his rental income and built leverage too! So did he take an LRD loan? Yes, of course, he did!
Benefits of LRD
a. Dual-use of the property- This loan allows you to maximise the use of the property
- To buy another asset through loan amount
- A steady flow of rental income after the full repayment of the loan amount.
b. No holes in your pockets! - Not a single penny is spent from your personal income, the EMI goes from the rental income which is however collateral to the loan.
c. No more over dues- As the bank allows rental inflow from high net worth tenants, such as MNCs and brands, there is stability in terms of regular rental payments. Hence there is a low risk of debt overdue.
d. Lower interest rates - LRD offers lower interest rates and long-term repayment tenure, which gives room to the borrowers to gradually pay the debt.
Both Salaried And Self-Employed Professionals (Including Doctors, Engineers, Dentists, Architects, Chartered Accountants, Cost Accountants, Company Secretaries, and Management Consultants) can apply.
Who can apply:
Any resident or Non-Resident Indian (NRI) can apply for an LRD loan.
The minimum loan amount that can be borrowed is Rs. 10 lakh and the maximum amount is Rs. 5 crores. In some financial organizations, there is no borrowing limit.
Minimum lease period:
The minimum lease period of the tenants of the commercial property should be 3 years.
The interest rate charged on LRD is 8.75% per anum. But the interest rate also relies on the rental income, tenant profile, loan amount, etc.
One can repay the debt in 10- 15 years.
Why do commercial loans raise a bar over other loan types?
Commercial property loans have very less limitations and provide ample advantages over other loans. For that let’s discuss the pros and cons of all the loan types-
1. Home loans -
The home loan is the most popular loan borrowed by the majority of Indians. This type of loan is taken by keeping an asset like gold, bond, or another residential property as collateral to buy a new house.
The home loan comes with tax benefits like 24(b) under which a deduction of Rs. 2 lakhs on interest can be claimed if the property is being purchased for self-use. Other than that, home loans have long loan tenures of around 10-15 years for one to have enough space to repay the debt.
This loan comes with high-interest rates. This loan can only be used to invest in the residential properties and not any other personal expenditures.
2. Reverse Mortgage Loans-
These loans are the exact opposite of mortgage loans and relief to senior citizens. Usually, senior citizens when retired do not have a steady monthly income flow. But many of them own real estate properties and can use their real estate investments in such cases. They just have to mortgage their real estate property in the bank, and in return, the bank pays them a fixed EMI as their monthly income. However, the borrower can apply the EMI income on a monthly/yearly/quarterly basis. The banks are allowed to sell the property in case the senior citizen expires. The loan repayment value is deducted from the amount in which the real estate is sold.
This loan is a support to the senior citizens and have no hassle of EMI payments.
The asset is forever acclaimed by the bank.
3. Second Mortgage loan-
This loan is taken over a property that is already under an existing loan. If a borrower purchases a property by taking a loan today, he can take an additional loan on the same property for personal needs. In this case, the borrower needs to pay his EMI on the second mortgage loan along with the first mortgage loan.
Pros- You can get a higher loan amount and underlying tax benefits on this loan.
Cons- These loans have a risk of foreclosure, loan costs can be expensive(for ex, appraisals, paperwork, etc.)
Taking into consideration all the pros and cons of different types of real estate loans, we can observe that commercial loans are flexible, come with lower interest rates and provide large loan amounts that too for longer loan tenures. Commercial loans can be used to fulfill any requirement no matter if it is personal or business-related. These loans help build leverage and so, you not only increase your debt but also benefit from it!
The commercial real estate sector has provided a lot of facilities for investments due to the introduction of Proptech in the real estate sector. Now, along with the high net worth people, common individuals like you and us, can invest in the commercial properties for as low as Rs. 500! How? Through Real Estate Investment Trusts (REITs) Who would have thought 10-20 years ago, that the real estate sector would introduce something like mutual funds for its investors?
The same goes for commercial loans too! Now commercial loans can be applied online! PropReturns provides you with commercial loans with the lowest interest rates that range between just 7%-9%. Invest in the best commercial properties, get loans, and invest in REITs on one platform!