Are you thinking of investing in commercial property? Is it the same as residential property?
When it comes to Investing in commercial and residential real estate there are some important differences to be aware of that can have a positive or negative impact on your real estate portfolio
Commercial and Residential property investment carry different challenges and levels of Risk and Reward, so it is important to investigate and conduct a thorough due diligence process before purchasing your property.
There are a range of property types that fall under commercial real estate. They can be standard or specialized. Standard property types include Retail, Warehouse, Factories, Offices, Medical Practices, vacant land and simple tenancies (1-2 tenants). Specialized property types include Hotels, Pubs, Service Stations, Childcare Centers, Shopping Centers, income producing land such as Farms and multiple or complex tenancies (more than 3 tenancies).
Obtaining finance for a commercial property is not as simple as getting a residential loan. Banks will require a larger minimum deposit for commercial property, usually around 30%, and the interest rates for commercial property will be higher than the interest rates offered for a residential property.
Commercial real estate investment is considered higher risk than residential property investment due to its susceptibility to market conditions. A commercial property can lose value and be harder to sell if a lease is about to expire or the commercial property is vacant. By comparison, although residential property investment is lower risk and prices are relatively stable, they carry a lower rental return than a commercial property.
The rental return for commercial and residential real estate also differs, in Australia’s capital cities, the average rental return for residential properties is 3.6% whereas the gross rental return for a commercial property is anywhere between 8% and 12%.
Commercial property leases are usually much longer than a residential lease of six to twelve months. Standard commercial leases are usually 5 years or more and Industrial property can have a lease of up to ten years long. It is important to be aware that while you might have your tenant for longer in a commercial property, it can take a lot longer to replace them.
The lease documentation for residential and commercial property are very different to one another. A residential lease is usually about four pages in length while commercial lease documents are more complex and can be up to fifty or sixty pages long.
The maintenance, rates and insurance costs of a residential property are the responsibility of the owner not the tenant while in a commercial tenancy, the tenant is responsible for the maintenance, rates and insurance costs. This is due to the fact that most commercial leases are net leases, meaning the tenant is responsible for the costs associated with the property.
Commercial property can be a great investment and a worthwhile addition to your real estate investment portfolio due to its ability to achieve higher returns and longer lease agreements, provided you have a mitigation strategy for the possible risks.
Looking to purchase a residential or commercial property?