Commercial versus residential investments?

Given the many new investors entering the property market last year, competition is fierce to find suitable residential investment properties. As an alternative, some investors are starting to identify commercial property as a feasible option for investment. 

Generally, a residential property investment is mostly straightforward and easy to understand, but commercial real estate is unfamiliar territory. Here’s a quick look at some of the things you may need to consider when investing in an Australia commercial property.

What is commercial real estate?
Commercial real estate is classified as property assets that are primarily used for business purposes. Such assets falls into three main categories: office, retail and industrial.

Size is often a determining factor in the type of investor they attract. Small office space and retail shops are often just as popular as residential property investments. Larger offices and retail spaces, together with industrial property investments, are usually preferred by those with greater commercial property investment/management experience.

As with most investment property, the capital growth potential of commercial property depends on its size, location and rental demand. In this respect, commercial and residential property investments are very similar.

The major difference between investing in commercial property compared to residential property is the rental agreement. With commercial property, the property is usually leased to a business under a detailed contract for a much longer period – typically three, five or ten years.

Commercial property has some unexpected benefits
A commercial property lease includes fixed agreements for CPI annual rent increases, and offers the added benefit of the tenant being responsible for meeting the cost of all outgoings. This means that the tenant has to pay for just about everything, including rates, maintenance and even land tax in some states (where the tenant is a publicly listed company).

And when it comes to maintenance, you can usually expect your commercial tenant to take more responsibility and do a much better job of maintaining the property than a residential tenant. That’s because it’s important for their business to look neat, efficient, attractive and well maintained. This element of commercial property investment can save you a considerable amount of time, money and hassle when compared to a residential investment.  It’s an important consideration.

Commercial property often attracts higher rents than residential property of approximately the same price. While smaller office and retail space usually returns about the same as residential property – around 4% – larger commercial properties and industrial properties can generate rents of up to 10%.

What are the drawbacks?
One expense with commercial property that isn’t encountered with residential property is the preparation of a leasing contract. Experienced legal professionals in commercial leasing area should draw up the lease since it’s  lmore complicated than an ordinary residential lease.

Additionally, commercial property is usually more impacted by the economy than residential property. Demand for will be determined by factors such as consumer confidence, unemployment, economic growth, interest rates and so on while demand for residential property is fairly constant.

These factors can make it more difficult to find a tenant. You may need to look harder and longer to find a tenant and you may have to make renovations or change use of applications with council to suit any tenant that you find. This can prove to be time consuming and expensive (even though the changes may often be tax deductible, you could still find yourself out of pocket).

Additionally, lenders often apply stricter conditions to financing commercial property than they do with a residential property investment. For example, it is quite likely that you will require a 30% deposit to purchase a commercial property and for some specific properties, you may even require as much as 50%.

Location is key when choosing a commercial property. You need to consider how your tenant will use the building and ensure it is strategically located to capture the right customers. For example, if you are purchasing a retail space you will need to consider pedestrian traffic and parking. Additionally, there are often zoning restrictions that govern a building’s use and these need to be checked out thoroughly before you make your purchase.

Find out if the numbers are right for you
With any property investment – whether it is a residential or commercial property – doing your research is essential to make a profit. Research your commercial property carefully and talk to us about your financing arrangements before you make the decision to buy.

We can help you to determine if the numbers stack up for your choice of commercial property, work out if it will be in line with your investment strategy and goals, then help you find the most suitable financing for your objectives. It pays to talk to professionals about your plans well ahead of time, so if you’re looking at making a commercial property investment in 2015, give us a call.

Yours sincerely, Top Ten Home Loans

About Paul Brazier