Recently, I had some friends who came to me asking about “Investing in Commercial Properties” after the previous post I wrote on commercial properties as an alternative investment. It is only then that it dawn on me not much was written about commercial properties, especially here in Malaysia.
Hence, here is my guide on investing in commercial properties after doing extensive research.
Investing in commercial properties is not too different compared to residential properties. The only downside to buying a commercial property is the higher upfront cost needed and to be extra cautious when signing the sales and purchase agreement (SPA).
Can you afford it?
As with all other investment, residential or commercial properties, it is important to first determine how far you can stretch yourself in terms of monthly repayments. Commercial properties are considered to be more expensive because of the higher purchase price and property tax.
Having that said, young investors should understand how much risk they can afford and plan accordingly.
Below is a simple list I use to determine how much money the bank is willing to lend me,
- Having a budget
- Saving for a down payment
- Saving for the legal fees and other relevant costs
1. Having a budget
The most important step in the whole process of buying a commercial property is to first understand your budget. Having a budget can be as simple as having your monthly net income deduct your expenses. Those extra savings can then be used to determine how expensive a property can you afford.
Step 1 : Know exactly how much is your monthly take home
If you are only a salary worker, I recommend using this salary calculator to find out how much income you take home every month. To know exactly how much you take home every month, all you need to do is key in the monthly gross salary from your employment agreement and any monthly bonuses (car bonus, mobile bonus or offshore bonus).
The calculator will then show you exactly how much you make after the tax and EPF deduction.
In the below example, I am taking home RM 5,304.85 every month after the relevant deductions.
Step 2 : Determine how much you spend every month
Financial commitments when it comes to the budget calculation is what we call monthly payments to bank / financial institution. To give you a good example, these are considered financial commitments.
Financial commitments that should be considered,
- Monthly car repayment
- Personal insurance
- Rent payments
- Food and grocery allowance
- Children education
In my case, my monthly expenses are about $1,300 which is about 25% of my monthly take home.
Step 3 : Calculate the excess savings that can be used to fund a commercial property
Take your monthly expenses and deduct them from the net income. This is the amount of money you have every month to finance the commercial property.
In my case, here is the calculation,
- Monthly net income : RM 5,304.85
- Monthly expenses : RM 1,300.00
- Savings every month : RM 4,004.85
Step 4 : Use mortgage loan calculators to get your property budget
The internet is a very convenient place and we are blessed with technology. There are a number of mortgage loan calculators but I do recommend this mortgage tool for the simplistic design.
The main purpose of the tool is to understand how much money a bank is willing to lend you by doing a reverse calculation of monthly mortgage repayment. In my case, I know that I have RM 4,000 every month which I can afford to put away into a commercial property. Now, all I need to know is which price range of a commercial property should I shop for.
Here are some parameters to consider,
- Down payment : 20% – this is a typical down payment for commercial properties
- Interest rate : 3.2% – I use this website to understand the general interest rate
After having all the needed parameters, you can easily determine which price range should you shop for.
In my case, I figured that I can afford any commercial property within the RM 1,000,000 range – monthly expected repayments at RM 3,877.43.
2. Saving for a down payment
The regular down payment for a commercial property is higher than residential property. Unlike residential properties, banks typically allow 80% – 85% as the maximum margin of finance for commercial property.
What this means to us, the young investors is that we will need to save up 15% – 20% of the commercial property value.
In the continued example, I have a budget of RM 1,000,000 to shop for a suitable commercial property. On top of that, I will need to save RM 200,000 (20% of the shopping budget) as cash for upfront payments.
3. Saving for legal fees and other relevant costs
There are quite a few purchasing fees a young investor should be familiar with. These fees are part and parcel of any property purchase, yet most agents will fail to advise you.
- Sales and purchase agreement legal fees
- Loan agreement legal fees
- Sales and purchase agreement stamp duty
- Loan agreement stamp duty
- Valuation fees
#1 Sales and Purchase Agreement Legal Fees
The below is the Sales and Purchase agreement (SPA) fees tier for commercial properties,
- First R M500,000 : 1.0%
- Subsequent RM 500,000 : 0.8%
- Subsequent RM 2,000,000 : 0.7%
- Subsequent RM 2,000,000 : 0.6%
- Subsequent RM 2,500,000 : 0.5%
To help you utilize the SPA legal fee tier, the below example breaks down the fee calculation,
- For commercial property priced at RM 1,000,000; SPA Legal Fee = (RM 500,000 x 1.0%) + (RM 500,000 x 0.8%) = RM 9,000
- For commercial property priced at RM 2,000,000; SPA Legal Fee = (RM 500,000 x 1.0%) + (RM 500,000 x 0.8%) + (RM 1,000,000 x 0.7%) = RM 16,000
Sales and Purchase Agreement legal fee is charged with 6% government service tax and the regular legal disbursement cost is anywhere between RM 1,000 – RM 1,500.
- Final SPA legal fee for commercial property at RM 1,000,000 = (RM 9,000 x 1.06) + RM 1,500 = RM 11,040
#2 Loan Agreement (LA) Legal Fees
As for the Loan Agreement Legal Fee, there is a price tier that you can refer to,
- First RM 500,000 : 1.0%
- Subsequent RM 500,000 : 0.8%
- Subsequent RM 2,000,000 : 0.7%
- Subsequent RM 2,000,000 : 0.6%
- Subsequent RM 2,500,000 : 0.5%
To help you utilize the LA legal fee tier, the below example breaks down the fee calculation,
- For commercial property priced at RM 1,000,000; LA Legal Fee = (RM 500,000 x 1.0%) + (RM 500,000 x 0.8%) = RM 9,000
- For commercial property priced at RM 2,000,000; LA Legal Fee = (RM 500,000 x 1.0%) + (RM 500,000 x 0.8%) + (RM 1,000,000 x 0.7%) = RM 16,000
The Loan Agreement legal fee is charged with 6% government service tax and the regular legal disbursement cost is anywhere between RM 1,000 – RM 1,500.
- Final Loan Agreement legal fee for commercial property at RM 1,000,000 = (RM 9,000 x 1.06) + RM 1,500 = RM 11,040
#3 Sales and Purchase Agreement Stamp Duty – also known as Memorandum of Transfer (MOT)
The below is the Sales and Purchase agreement (SPA) stamp duty tier for commercial properties,
- First RM 100,000 : 1.0%
- Subsequent RM 400,000 : 2.0%
- Subsequent RM 500,000 : 3.0%
- Thereafter : 4.0%
To help you utilize the SPA stamp duty tier, the below example breaks down the fee calculation,
- For commercial property priced at RM 1,000,000; SPA stamp duty = (RM 100,000 x 1.0%) + (RM 400,000 x 2.0%) + (RM 500,000 x 3.0%) = RM 24,000
- For commercial property priced at RM 2,000,000; SPA stamp duty = (RM 100,000 x 1.0%) + (RM 400,000 x 2.0%) + (RM 500,000 x 3.0%) + (RM 1,000,000 x 4.0%) = RM64,000
#4 Loan Agreement Stamp Duty
Commercial property loan agreement stamp duty is 0.5% of the loan amount. Below is a quick example of an 80% mortgage loan for a RM 1,000,000 commercial property,
- For commercial property at RM 1,000,000 with 80% mortgage loan; LA stamp duty = (RM 1,000,000 x 80%) x 0.5% = RM 4,000
#5 Property Valuation Fee
According to the JPPEH website, the valuation fee for any sub-sales commercial property is according to the below tier. However, this does not apply to any commercial property in the primary market.
- First RM 100,000 : 0.25%
- Subsequent RM 2,000,000 : 0.20%
- Subsequent RM 7,000,000 : 0.167%
- Subsequent RM 15,000,000 : 0.125%
- Subsequent RM 50,000,000 : 0.10%
- Subsequent RM 200,000,000 : 0.067%
- Subsequent RM 500,000,000 : 0.05%
- Subsequent RM 500,000,000 : 0.04%
How much money should I prepare to buy a commercial property?
To purchase a commercial property in Malaysia, you should prepare at least 26.5% of the property price as cash for upfront payments. At the very least, you should have enough savings to cover down payment, legal fees, stamp duties and valuation fees.
- 20% of property purchase price for down payment
- 6% of property purchase price for legal fees and stamp duties
- 0.5% of property purchase price for valuation fees
If you want to do a quick calculation on the legal fees and stamp duties, I recommend the following tool for your convenience.
EPF withdrawal is not allowed for commercial properties with the exception of serviced residences and SoHo.
Getting a commercial property loan
Now that you figured out your budget, the next step is to leverage the bank’s money. Investing in commercial property can be highly lucrative if all factors work in your favour – rental income and capital gain. I have written a piece on the 4 factors to consider when shopping for a new property which I believe will be extremely useful for you.
Now, on borrowing money from the bank and applying for a mortgage loan to finance the commercial property you wish to buy. There are a few things you should consider when applying for a mortgage loan,
- How much money can I borrow?
- What are the bank’s criteria for commercial loans?
- What document should I prepare?
- What should I look out for in a loan offer?
#1 Margin of finance for commercial loans
The highest amount a bank can lend for a commercial property mortgage is 85% of the property value. This limit is set by Bank Negara and is imposed for all commercial properties for commerce purposes. Unlike residential loans, there is no limit to how many times an individual can borrow at 85% of the property value.
It is important to note that while the highest margin of finance is 85%, the average loan margin is at 80% for investors with decent cash flow. The bank will also look into the investor’s personal or company financial portfolio (savings and other investments) before underwriting a suitable loan offer for the commercial property.
If your credit history is strong with sufficient funds every month to finance the property, the bank might just be in favour to give you a higher loan margin at up to 85%.
#2 Property criteria banks consider when underwriting a commercial loan
Generally, banks will have their own valuation of the property separate from the agreed purchase price between buyer and seller. As part of the valuation, banks will consider location, property type, land titles, total units in the building and surrounding property valuation.
List of considerations, including but not limited to,
- Location of the property
- Accessibility
- Commercial property type
- Land title – freehold / leasehold
- Total units in the building
- Mixed development or commercial development
- Surrounding property valuation
This step is crucial because if the bank’s valuation is lower than your purchase price, the amount you can borrow will be lower than expected.
To give you an example,
- Agreed purchase price with seller : RM 1,000,000
- Bank’s valuation of property : RM 900,000
- Loan offer of 85% will be based on the lower value : RM900,000 x 85% = RM 765,000
Fret not if the bank you applied to gives you a lower valuation than you hoped. That is why I believe it is always good to apply to at least 3 different banks and to compare the loan offers from them. You are bound to get an offer that is in your favour.
There is a caveat to that thought process. If the property is overpriced, it can be really difficult to get a bank valuation to meet that expectation. Perhaps you might want to relook into your analysis and ask yourself, “Is this property a good investment if it is overpriced?”
#3 Preparing documents for loan application
Buying under personal capacity
If you are buying the commercial property in your personal capacity, you will need to prepare the following documents for bank submission. The list may differ from bank to bank but the list should cover most of it,
- Identification card
- Employment letter
- Monthly payslip for the past 3 months (if with employment)
- Monthly payslip for at least the past 6 months (if self-employed; insurance agent, property agent, freelance photographer, etc)
- Latest EPF statement
- Bank statement
- Savings account statement (to show financial stability)
- Investment account statement (to show financial stability)
Buying under company
On top of the previous list required for personal application, you will need to provide additional documents listed below,
- Company profile
- Latest profit and loss statement
- SSM Form 9 – Certificate of incorporation
- SSM Form 24 – Return of allotment shares
- SSM Form 49 – Particulars of registered directors and secretaries
- Memorandum of article
- 12 months bank statement
- Latest audited report
If your company is a sole proprietor, the additional documents are required,
- SSM Form A – Sole Proprietor Business registration form
- SSM Form D – Certificate of registration
- Business card
#4 Key details to look out in a loan offer
Like it or not, the term sheets on any loan offers are written in a way to protect the bank’s interest. You as the borrower should also play your role to go through the terms, fully understand what is stipulated before signing any loan offer.
This is the list of things I usually look out for when going through a loan offer,
- Type of loan
Is it a fixed loan / flexi loan?
Personally, I prefer to opt for the full flexi loan such as CIMB’s BizFlexi Smart loan for the flexibility of prepayments. Ultimately, I get to pay more to either save up on interest paid or loan tenure. - Amount of loan
Is it a 85% loan margin or lower? Do I need to prepare more cash to purchase this commercial property? - Purpose of the loan
In some cases, the bank does give you the wrong loan. So you want to make sure the loan offer is for your commercial property - Loan tenure
The maximum tenure for commercial loan is 25 years. Longer tenure means lower monthly instalments but higher total interest paid. - Interest Rate
I believe this is rather self explanatory. Lower interest rate is always ideal but do keep in mind other factors such as tenure and prepayment flexibility. - Set up / processing fees / monthly charges
It is always a good idea to compare between loans and see which bank gives you the lowest fees. - MRTA / CLTA / Fire insurance
Some banks make it compulsory for you the borrower to have a personal insurance for the duration of the loan. While it is not a big deal, it can be extra expense that might lower your profitability.
Final Word
Buying a commercial property is really not too difficult if you understand your budget and how a commercial loan works.
