Investment Advice
COMMERCIAL VS. RESIDENTIAL
With many new investors entering the property market over the last year, competition for suitable residential investment properties has become fierce. As an alternative, some investors are starting to recognise commercial property as a viable investment option.
For most of us, a residential property investment is fairly straightforward and easy to understand, whereas commercial real estate is unfamiliar territory. Here’s a quick look at some of the things you may need to consider when investing in a commercial property in Canberra/Australia.
What is commercial real estate?
Commercial real estate is classified as property assets that are primarily used for business purposes. This property falls into three main categories: office, retail and industrial.
The major difference between investing in commercial property compared to residential property is the rental agreement. With commercial property, the property is usually leased to a business under a detailed contract for a much longer period – typically three, five or ten years.
Commercial property has some unexpected benefits
A commercial property lease includes fixed agreements for CPI annual rent increases, and offers the added benefit of the tenant being responsible for meeting the cost of all outgoings. This means that the tenant has to pay for just about everything, including rates, maintenance and even land tax in some states.
And when it comes to maintenance, you can usually expect your commercial tenant to do a much better job of looking after the place than a residential tenant. That’s because it’s important to their business that the premises look tidy, attractive and well maintained.
Commercial property often generates higher rents than residential property of approximately the same price. Whilst smaller office and retail space usually returns about the same as residential property – around 4% – larger commercial properties and industrial properties often return as much as 10%.
What are the drawbacks?
One expense with commercial property that you won’t encounter with residential property is in the preparation of the leasing contract. This should be drawn up by a legal professional who is experienced in the commercial leasing area as it is a lot more complicated than an ordinary residential lease.
Additionally, commercial property is usually more influenced by the economy than residential property. Demand for your property will be determined by factors such as consumer confidence, unemployment, economic growth, interest rates and so on. Whereas demand for residential property is fairly constant.
Lenders apply stricter conditions to financing commercial property than they do with a residential property investment. For example, it is quite likely that you will require a 30% deposit to purchase a commercial property and for some specific properties, you may even require as much as 50%.
Find out if the numbers stack up for you
With any property investment – whether it is a residential or commercial property – doing your research is the key to making a profit. It pays to talk to professionals about your plans well ahead of time, so if you’re looking at making a commercial property investment in 2015, just drop us a line.
