…To become a successful investor, you need to take that first step…
The residential vs commercial property debate continues with investors with most favouring residential property. Why? Everybody knows about residential property, we all live in a home and we feel we know it better. We read, hear and see it in the media all the time with prices booming, pricing crashing, and as a result it seems the safer or better option. But really, it’s not. Commercial property is simply mis-understood by many.
We’re not saying that residential properties are a bad investment, on the contrary. If you’re just starting out on your property journey, and don’t have a large deposit, then yes – go for a residential property because it’s the easiest way to get on to the property ladder. Buy as many properties as you can comfortably afford in the coming years by leveraging as much as possible.
But there will be a time when you’ll need and want to go to the next level, and that’s were commercial property will be your next path.
The key benefits of commercial property are:
The below table gives you a quick snap-shot of the relevant differences of residential and commercial property.
| Property Type | Residential | Commercial |
|---|---|---|
| Deposit Required | 5%-20% | 20% - 35% |
| Yields | 2% - 6% Gross | 4.5% - 8 % Net |
| Leases | 6-12 months | 1 to 20+ years |
| Due Diligence Required | Minimal | Very comprehensive |
| Bond/Guarantees | 1 months rent | 1-6 months and/or bank guarantee |
| Vacancy | 1-4 weeks | 1 month to 1 year (average) |
| Outgoings | Paid by the owner | Paid by the tenant |
| Repairs & Maintenance | Covered by the owner | Covered by the tenant |
| Depreciation | Low-average | Much higher |
| Cash Flow | Negatively geared to neutral, over time - positive | Highly cash flow positive from Day 1 |
| Property Management | Intensive | Low-medium effort |
| Loan Interest Rates | Variable over time | 0.5% - 1% higher than residential rates |
| Capital Growth | Market dependent | Market & rental increase dependent |
| Value Adding | Renovations & developments (Subdividing, extending, duplexs, townhouse etc) | More options available (Development, renovations/refreshing, advertising space, telco towers etc) |
Sounds like commercial property is perfect, but its not all smooth and care-free sailing when you decide to buy a commercial property, there are some key differences to consider from the above table.
Entry into this asset class requires a much higher deposit and up front costs. But you tend to recover this difference within the first two years of commercial property ownership. You can see an example of the cost differences in our resources section here.
Due diligence is much more detailed and critical with the property, tenant & lease. This point is key, because you can still make a meal out of your investment journey if you get it wrong. But that’s what we do and this is how we can help considerably to make sure you buy the right asset for your investment goals and objectives.
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