Residential vs Commercial Property Investment

Self-Employed | 21 Oct, 2020

There are many benefits to commercial property investment vs residential property investment for all types of investors.

Throughout 2020, I’ve started to see an increasing level of interest in commercial property investment. Long-term residential investors are looking to diversify and spread their risk into commercial property. And current low-level interest rates are making commercial property an affordable, and lucrative, option for investors generally.

While commercial property investing has historically been something undertaken by experienced investors, this is simply not true anymore. In fact, there are many benefits to commercial property investment versus residential property investment. And the types of investors looking to achieve these benefits has widened greatly recently.

So, what are the benefits of commercial property investment versus residential property investment, and is this type of investment right for you?

Residential vs Commercial Property Investment

Types of Commercial Properties

It’s important to note that there are different commercial property segments in the market and they’ll each react differently to various economic factors.

While retail properties are currently tricky, industrial properties are showing good growth. This is partly due to the growth of online retail warehousing requirements and partly due to the strength of that segment generally. In the same vein, offices in the greater metro area are showing growth, while those in the CBD itself are not as strong.

How do residential and commercial properties differ?

Lease length

Office, retail, industrial and commercial properties usually have much longer leases than residential properties. This means that there are less costs associated with marketing and finding suitable tenants. Of course, the lag time can be a bit longer between tenants as well, so understanding your cashflow is important in those situations.

Vulnerability to economic upheavals

Historically, commercial properties have been more vulnerable to economic upheavals than residential properties. But this has not proven to be the case any longer. In fact, commercial properties in the industrial and office space segments are holding very strong, while the residential market has taken a dip (though varying) Australia-wide.

Lease terms

Commercial tenants negotiate more than residential tenants and that means that commercial leases are generally more heavily negotiated than residential leases. This also means that commercial landlords can work with each tenant to create lease term that suit the specific situation. Of course, because the leases are usually negotiated, you will likely need a lawyer to manage this negotiation.

Initial capital requirements

Initial capital requirements when buying a commercial property are generally 30%, where residential properties are usually around 10% or even less. However, we’re seeing highly competitive lenders coming through now, and at least one is currently offering a 20% deposit on commercial loans.

Rental yields

While initial capital requirements are higher, in Brisbane we are currently seeing net rental yields of 6.5%. This means that you’ll be able to claw back that higher initial output within three years of purchasing the property.

Annual rent increases

Commercial leases typically include an annual rent increase (residential do not). These can be as much as 4%, much higher than inflation.

Capital growth

Most investment experts believe that commercial properties experience slower rates of capital growth than residential properties.

Wider range of price points

It’s a widely-held misconception that commercial properties are much more expensive than residential. Of course some properties will be very expensive, such as high-rise unit blocks, but others are much cheaper. For example, you might be able to get a carpark for as little as $80,000.

Maintenance and repairs

With commercial property, tenants often sign ‘gross leases’. These mean that the tenant, rather than the landlord, is responsible for council rates, insurance, land tax, maintenance and repairs. This simplifies the cashflow analysis.

Higher risk

Commercial tenants are often considered to be higher risk than residential tenants. So, it’s vital that you complete comprehensive due diligence as part of the purchase. This includes the nature of the business, the rental receipt history, particularly for the 2020 calendar year and how long they’ve been in their current premises.

You can ameliorate this risk by ensuring that you purchase a property that is not specialised. That means there will be a wider potential tenant pool to pull from.

Higher knowledge

Commercial investors need to understand more about investing than residential investors. They need to be able to negotiate contracts, find tenants and maintain cashflow to support their investments during difficult economic times. But with the right team of experts on your side, getting the knowledge you need is simple and straight forward.

Choosing Your Investment

Commercial properties can be excellent investments. They are a good way to diversify your investment portfolio to give you more flexibility during times of economic change. They give you a higher rental yield. And low interest rates means it’s a great time to dip your toe into a new type of investment.

Getting Started

Now is the time to seek professional guidance.

  1. Start to explore some information sources, such as the Inside Commercial Property Podcast
  2. Speak to a commercial property lawyer about the legal requirements.
  3. Speak to a buyer’s agent, such as Rethink Investing, about available properties.
  4. Get in touch with me, or your own mortgage broker, to understand your options for a business loan.

Understanding your position and your options will give you a fantastic opportunity to consider investing in commercial property. And despite the historical opinions, commercial property investment is a great option for any property investor.

If you’re interested in funding a commercial property, get in touch. We’re ready to help.


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