The question on whether it’s better to invest in residential over commercial, still remains an issue and would always be a topic on any debate among investors.
Proponents of investing in residential say it’s the least risky option, while those who are in favour of commercial would argue that commercial is safer due to its cash flow potential.
Smart investors of course don’t choose between the two: They look at both to see how it may fit their portfolio.
The average rental return for residential properties across Australia’s capital cities is 3.6% according to CoreLogic RP Data. In contrast, it’s not uncommon to get anywhere between 8% and 12% gross rental yield for commercial properties.
While a residential tenancy can turn over every six to 12 months, a commercial tenancy can be anywhere between three and 10 years. Tenants also tend to stay longer especially when they’ve invested some capital customizing the premises.
Unlike residential properties where landlords are liable for paying rates, such as council, water and body corporate, commercial tenants pay these outgoings for you.
Commercial properties are generally lower priced compared to residential properties so you need a smaller capital outlay. For example, a commercial office can cost as little $150,000 as opposed to $400,000 for a studio apartment. Investing in commercial property could be a great way to get into the market sooner compared to saving for a residential property investment.
While commercial property looks attractive on paper, there are potential risks you need to be aware of before investing.
When the economy is strong, businesses flourish and demand for commercial properties generally rises. But when there’s an economic downturn, demand for commercial premises usually falls.
While commercial properties attract long-term leases of three to five years or more, it can take longer to find a tenant. It’s not uncommon for commercial properties to have long vacancies, which means you will need to cover all the cost during this period.
Changes in supply conditions can create potential problems for investors. An increase in new property coming on the market in the same area creates a threat to existing tenancies as tenants may look to upgrade or expand. Strong supply can also reduce potential yields.
While major infrastructure changes in the area can attract commercial investments there, it can also lure tenants away from existing areas and older commercial premises. This could result in your property becoming vacant.
The value of commercial properties closely correlates with the lease on the property. If a commercial property becomes vacant, or the lease is about to expire, the value of the property would generally be expected to fall. In contrast, any price falls associated with residential properties are generally less dramatic and usually happen progressively over a longer period of time.
It depends where you are now in your portfolio. If you’re looking to diversify and want a cash flow injection, a well-located commercial property might be a good addition. Just make sure you do thorough due diligence and understand the risks involved.
For more on investing, click below to read our information on
Address: Suite 1512/83 Spring Street Bondi Junction 2022
Postal Address: PO Box 2192 Bondi Junction NSW, 1355
Telephone: 1300 132 970
E-mail: info@searchfindinvest.com.au
