What you need to know about Investing in Commercial v/s Residential Property

Residential and commercial properties investments, have advantages and disadvantages, and which asset is best for you will depend on your specific circumstances. Read more about the difference between residential and commercial property investment.

Investing in Commercial v/s Residential Property

Residential real estate investment gets the most attention these days, but there's another sort of asset that combines the safety of bricks and mortar with high profits and long-term stability.

Commercial properties, like homes, come in a wide range of prices and locations, but they also provide a greater variety of asset types.

Residential and commercial properties, like other investments, have advantages and disadvantages, and which asset is best for you will depend on your specific circumstances.

But, having helped investors purchase both residential and commercial assets, Mr Harvey a professional buyers agent and CEO of propertybuyer.com.au says commercial assets have a “greater risk factor” and that it pays for first-time investors to take their time and conduct proper due diligence before making a purchase.

To help you get started on your commercial property investment journey, here are answers to some of the most important questions.

The good news is that, once invested in the commercial market, strong yields and a higher deposit increase the likelihood that your property investment will be positively geared.

commercial property loan in melbourne
How to get a commercial loan the right way?

Why you should consider investing in commercial over residential property?

Seasoned investor or first-timer, commercial property has some distinct advantages.

  • High yields (return relative to purchase price)
  • Better cash-flow and higher chance of being “positively geared”
  • Long-term tenants
  • A wide variety of asset choices and purchase prices
  • Locked-in rent increases
  • Opportunities for capital growth
  • Low maintenance
  • Outgoings are paid for by the tenant

How is commercial property investment different to residential?

Commercial property investment comes with a deal more complexity than residential investment, requiring prospective buyers to be well-versed on the ins and outs of commercial leasing and to have a higher financial buffer in place. Some of the risks associated with commercial property include:

  • Longer vacancy periods between tenants
  • Variable lease lengths and conditions
  • Higher deposits are required when purchasing
  • A high level of research and due diligence is required
  • Purchasing process can be confusing for first-time buyers
  • A property’s value is largely reliant on the strength of its lease
  • Capital growth is tied to business confidence
  • Large repair jobs could be expensive

Do commercial properties provide the same capital growth as residential properties?

Commercial properties can still provide decent capital growth, but there are more variables at play than in the residential market and values are more volatile. While residential values might follow city or suburb-wide trends, where a commercial property is located within a suburb and what the economy looks like both have a bigger impact on commercial values. “It depends where they’re located,”  “Capital growth is dependent on a couple of things. Even within a suburb it depends where the asset is located and what kind of exposure it receives. It also depends on the business cycle. ” Another thing affecting property values is the length of the lease and the strength of the tenant. “The value of a commercial property depends on the value of the lease. For example, if you’ve got a five-by-five-year lease [meaning an initial five-year term with a further four five-year options] with Woolworths that’s an incredible lease.

Are commercial properties less affordable than residential properties?

While most residential properties consist of apartments and houses (as well as others such as townhouses and villas), commercial investments could be anything from a parking space to an industrial warehouse or childcare centre. This means prices can sometimes start from less than $50,000, but can also go up well beyond the cost of a home. “There are a lot of reasons why a first-time investor should consider commercial,” says Chris Kombi, a director at Melbourne-based commercial agency Fitzroys. “Generally they provide a higher return on investment and the tenant generally pays all of the outgoings. People are also looking for more security when it comes to commercial property, with long lease terms and inbuilt rent increases.” Mr Kombi suggests prospective buyers start their property search by defining the price they can afford, the asset type that best suits their needs and the area they are willing to buy in. “Commercial real estate can be as affordable as you want it to be really. It’s just a matter of searching within your price bracket,” he says.

Will I need a bigger deposit to buy a commercial property than a residential property?  

Unlike a residential loan, where you can borrow up to 90 per cent of the property’s purchase price, commercial loans tend to come with a higher deposit requirement, or loan-to-value ratio (LVR). Of all the commercial transactions Mr Kombi has facilitated, he says that it’s this fact that catches the most buyers by surprise. “I think in the initial stages the biggest surprise is when they go to their bank to borrow money to buy. They don’t realise that unlike your residential loan where you can borrow 90 per cent of the money, in commercial it could be as low as 30 or 40 per cent and is usually 60 per cent. For instance, if the property is worth $1 million and the bank will only give them 50 per cent they’ll need to come up with another $500,000,” he says.

Expert Mortgage broker to help you choose between Residential & Commercial Property investment
If you are a first time investor or a professional real estate investor looking for a mortgage broker near you to help you identify the best interest rate on your residential or investment property loan, speak to our expert mortgage broker at Deals Mortgage who can provide you information on the market insights and the best loan offers.

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