Investment property – commercial v residential
Intro: Familiarity mean residential tends to win the competition for investors’ money. But there are real advantages in investing in commercial property.
When it comes to property investment the residential market gets the lion’s share of attention, whether it’s constant media coverage or advice on where and what to buy for maximum returns.
That is just one contributing factor to why the majority off investors gravitate towards residential property.
Buying a house as a rental seems to be an easy entry into property investment, and in many ways it is. We all live in houses or apartments and so feel that we know and understand them, whereas a commercial property can seem far outside our comfort zone, simply because they are different to our experience of homes and property.
The lack of familiarity raises many unfounded concerns. What if the tenant moves out? What if they don’t pay the rent? What if we lose money?
These are all valid questions, but the key is understanding the fundamentals of the commercial property market.
Tenants only move with a good reason. Not only is there the physical cost of moving, there is the disruption to business and customers, and clients often don’t like change, even a change of location.
Business failure may result in a vacancy, but as with any property investment, location is key. Good locations attract tenants, so taking advice and choosing wisely when purchasing reduces the risk of longer term vacancies.
In the same way that you will always pay more for premium locations with higher rentals, secondary properties, while achieving lower rents, will sell for lower prices, and are likely to still make for very attractive investments.
What really separates commercial from residential investment is the yield on investment.
Residential tenants pay a gross rental meaning the landlord covers the rates and insurance, while in most cases the commercial tenant will let on a nett basis whereby they pay the rent, plus the occupancy costs of rates, insurance and body corporate. The overall result is generally a much higher yield than residential, usually between 5% and 9%, or even higher depending on the location, type of property and lease terms.
In a time of falling interest rates where bank rates for term deposits are also very low, commercial property is an extremely viable option for securing an ongoing income.
For an overview on what's available in the commercial property market, ask your NAI Harcourts sales consultant for the latest copy of our Key Assets portfolio, or view HERE.