The purchase of commercial property is a necessary part for an entrepreneur as in other cases, the operating cost of the business may increase continuously. Banks can quickly provide loans to the businessman who has a profitable business. The requirement of commercial space can be a shop, warehouse, office space, or a go-down. Banks require the property with clear titles and the profit & loss statement to understand the business’s condition. Also, for investment purposes, banks can provide loans to a buyer as the commercial space, especially the shop space, provides higher rentals than the residential property. The loan to value ratio is 55% for commercial property compared to 80% for residential property. And the processing fees are 1% of the property value. And also, the interest rates charged by the bank are higher than that of the residential property. The banks also do check the CIBIL score of the loan applicant before the approval of loans. The banks usually expect a minimum credit score of 700 points for the loans to get approved. Below the score of 700 points, it is demanding that the bank may approve the borrower’s loans.
There are, in general, significantly few benefits for the borrowers who opt for commercial property loans. The tenure of the loans for a commercial property is ten years maximum. The banks are extra cautious about the disbursement of loans for commercial property as the chances of turning into lousy debt are higher in commercial property than residential property. Many banks suffer from bad debts, and the maximum under-recoveries are from commercial or business, or enterprise loans. The documents of the property should be with clear titles before the approval of loans. Many shops or warehousing premises are being constructed on an illegal encroachment for which the banks may turn down the request for the loans. The appreciation for a commercial property is far higher than the residential property; thus, the investment is worth it for the buyers in retail shops especially. The availability is also scarce; thus, the appreciation levels are also high for a commercial shop. The per square feet rate of a commercial shop or an office space is quite expensive compared to the residential areas.
Following are the benefits of the commercial spaces:
- The appreciation of the property is far higher as compared to residential space.
- The loans can be easily obtained up to 55% of the property value in the borrower’s good credit history and income.
- The commercial properties are scarce and are high in demand; thus, the growth of the property is higher, and the resale value can be expected to high.
- Commercial spaces are mainly based on a prime location as the rooms are meant for commercial activity.
- The rentals yield gained through investment is also high in the case of commercial property.
- By purchasing the commercial property on loan, the borrower can gain huge returns by carrying out the business activity. Thus the commercial properties can help the borrower become more prosperous by investing in a commercial property.
Disadvantages of owning a commercial property by opting for loans:
- The commercial property is already valued much higher as compared to the residential property. Thus investing is difficult for the borrower in the case of commercial property.
- The banks are more careful and selective in offering commercial loans as the maximum chances of turning into lousy debt are high in commercial property.
- The interest rates charged are high in the commercial property as compared to the residential property by the bank.
- The tax benefits offered by the government is also only on the interest amount and not on the principal amount.
- Sometimes some commercial properties lack basic hygiene like the proper toilets or the place around which the property is located. Still, in other cases, highly lavish commercial spaces are available if the borrower opts for the costly areas.
Following are the documents for the purchase of commercial property:
- Application form duly filled and signed along with the passport size photographs.
- Income statement of last three months.
- Credit score rating documents stating the CIBIL score of the borrower.
- In the case of being already an entrepreneur profit & loss statement, the borrower is certified by a charted accountant.
- In the case of an employed person buying commercial property, salary slips and employment proof of the borrower.
- Income tax returns[ITR] duly filed for the past three years.
- Identity proof Xerox of the pan card, aadhar card, driving license, passport, or other government recognized identity proof.
- Property documents with clear titles on which the loan is applied
Thus, buying a commercial property is a better option than residential property for an investment purpose as the amount of appreciation is far higher than the residential property. The loans can be availed from any commercial bank by submitting the proper documents to the lender. Banks are careful but keen on providing loans to the borrowers for retail purchase of the property as the market for the finance companies is highly competitive.