Commercial buy-to-let explained

Those looking for a new investment opportunity might be intrigued by the commercial buy-to-let industry.

If you aren’t impressed with the returns available on a traditional residential buy-to-let, going down the commercial route might be more enticing. It offers more security, incurs fewer ongoing fees and you can keep all of your investments under one limited company. This helps to reduce your personal liability, so your assets won’t be at risk if your property management company is dissolved. Read on to find out more about commercial buy-to-let.

What is commercial buy-to-let?

Just like a residential buy-to-let, a commercial buy-to-let involves purchasing a property with the sole aim of renting it out to another business. This might mean buying a shop front, investing in an out-of-town shopping centre or buying warehouse space.

Rents on commercial property tend to be higher, so this can be a very tempting investment opportunity if handled correctly. It’s important to remember that there are risks involved with any investment.

Securing funding for a commercial buy-to-let can be more difficult as it not only takes into consideration the value of the property. It also looks at the potential rental value and the value of the business that rents the space. This is why most commercial buy-to-let mortgages need to have a tenant lined up before any funding can be put in place.

How do I secure a commercial buy-to-let mortgage?

If you have a large portfolio of high-value properties, ring fencing your investment in a limited company is the best way forward. This will mean that you apply for a mortgage on behalf of your limited company rather than being forced to go down the personal funding route. Funding a large commercial property with a personal mortgage is not only going to be costly, but it can also lead to complications down the line.

Can any limited company get a commercial mortgage?

If your sole business activity is property investment and lettings, then you will need to register your limited company as a special purchase vehicle (SPV). This business classification makes it far easier to secure a commercial mortgage.

If your business is engaged with other types of activity, then you will not be able to register with this classification. You might consider setting up another limited company and keeping your property investment separate from the rest of your business activities.

Benefits of commercial buy-to-let

One of the biggest benefits of commercial buy-to-let over residential buy-to-let is increased security due to longer leases. With residential property, each tenant might only stay on an assured shorthold tenancy agreement for 12 months or even 6 months. This means you could be searching for new tenants – or paying an estate agent to find new tenants – at least once a year.

With commercial property, most lease terms are much longer, usually spanning years. It’s not uncommon for a company to sign a 10-year lease with a break clause after 5 years. This offers greater security for the investor.

Another benefit of commercial buy-to-let is the low cost of maintenance. Most commercial tenants will sign something known as a fully repairing and insuring lease. This means the tenant is responsible for the property. Compare this to a residential let where the landlord is responsible for the boiler, washing machine, oven, roof, flooring, windows etc.

Where to find a commercial buy-to-let mortgage

This is a highly specialised type of mortgage so you should only work with a specialist lender. Start by speaking to a commercial mortgage broker who understands the industry and they will be able to point you in the right direction. When handled correctly, commercial buy-to-let can be a highly lucrative industry.