Commercial vs Residential

Most people think of residential property when they’re thinking about investing, but commercial property has its rewards too.

The benefits of investing in commercial property

• Leases tend to be much longer – anything from three to 20 years - and they are quite often secured by bank guarantees, which make them a secure investment.
• Rent is reviewed annually and is usually increased either by the CPI or by 4%, whichever is the greater.
• Commercial tenants will also tend to maintain the property better as the look and condition of the property is important to their business and their staff. But commercial leases also have added protection for the owner in the form of make good clauses, maintenance clauses and management clauses.
• The return on invested capital on commercial properties ranges between 7% and 10% net after all costs.  Residential property investors must pay all outgoings and other costs, although of course this can be negatively geared. Deductible rates on commercial property, though, are higher than for residential because of higher depreciation rates.

The benefits of investing in residential property

• You need a smaller deposit, which can be important in particular if this is your first investment property. Depending on your credit history and income, you can even borrow 100% of the purchase price. Commercial mortgages require a deposit of at least 30%. Rates on residential mortgages also tend to be lower.
• Lenders are much stricter on borrowing criteria for commercial properties and if the property is not let at the time you purchase it, you may have to pay GST.
• The commercial property market can be less predictable than the residential market (where historically properties tend to double in value every 7 to 10 years). There are also different kinds of commercial property to consider such as commercial, industrial and retail. With proper research, you may find that you are more comfortable making the decision about which type of property to invest in.
• Although residential leases are shorter than commercial ones, residential properties are generally easier to let, meaning you will have less time when the property is vacant. It can take months to find a new commercial tenant.

Whether you choose residential or commercial property, the more you know about your market, the safer your investment will be.

Your Finance Today broker can help you with local knowledge, help you work out how much you can afford to borrow and which loan best suits you.