When thinking about property investment, most people tend to think about residential property rather than commercial. Perhaps this is because it seems more familiar, with many investors already owning their own home and being familiar with residential property purchase.
We have recently been asked our thoughts on commercial property investment. While this is not an area of investment we service ourselves (we do one thing and do it well - residential property management!), we understand the key differences between the two methods of investment and thought a quick article may be helpful to some.
Just as there is no definitive "right or wrong" answer to whether you should build new or buy existing residential investment property, there is no single answer to which investment method - residential or commercial - is better. The best investment solution depends on the financial position of the investor, tolerance for risk, and investment objectives.
What are the main differences between residential and commercial property investment?
Commercial property generally produces a stronger stream of income given that retail and office tenants pay more rent than residential tenants. Cash flow is also enhanced in commercial property as rates and insurances are generally covered by the tenant, unlike residential property where the landlord must meet these expenses (excluding contents insurance of course).
Capital growth potential
Capital growth is relatively lower however in commercial property generally. This will naturally vary with the specifics of the investment, however the value in most commercial investment opportunities is taken by the building being invested in, rather than the land value. Land appreciates while buildings depreciate, therefore the lower the land value being invested in generally the lower the capital growth potential. Keeping this in mind, it is the potential for a strong rental return which is the key attraction of commercial property investment.
Lease periods are typically much longer in commercial property than residential. Residential leases are typically 6 months, 12 months, or 24 months in duration, while commercial leases are often 3, 5 or 10 years.
Commercial property is less predictable than residential, given it is strongly influenced by economic factors such as consumer confidence and unemployment. External threats such as increased supply (e.g. the development of more modern or better-appointed options nearby), and even changes in traffic flow or parking restrictions can have a significant impact on desirability of a commercial property. Once impacted in this way, commercial property can remain vacant for long periods of time and offer poor resale value. During this time, all costs associated with the property must be met by the owner.
Stricter lending conditions apply to commercial investment, with investors sometimes required to have a minimum 30 to 50% deposit. That said, a commercial investment opportunity may cost less than a residential property overall, such that the higher 30-50% deposit requirement may equate to a similar 10-20% deposit on a higher-priced residential property.
In summary, neither residential nor commercial property investment is the definitive "best" solution. Either could be the best option depending on the investor's circumstances, appetite for risk, existing portfolio and of course the details of the opportunity itself.
Need to speak with someone about managing your residential investment property? Contact us today.
Carnelian Property Management Newcastle NSW
We are a family-owned and run Charlestown real estate agent offering expert property management across Newcastle and Lake Macquarie.