Is Investing in Commercial Property the Better Option?
Some people believe that investing in commercial property is the way to go because it has better returns. However, there are those who prefer investing in residential property because it is less risky. As an investor, which option should you consider? commercial or residential?In this review, we will look at both the good and the bad sides of commercial property investing.
Why Invest in Commercial Property?
- Better return on investment (ROI): According to data from CoreLogic RP, commercial property in Australia’s capital cities such as Melbourne, Perth, or Sydney attracts a gross rental yield of between 8 and 12 %. On the other hand, rental return on residential properties in the same regions is approximately 3.6%.
- Longer Leases: The tenancy lease is much longer in commercial property compared to rental property. The tenancy period in commercial property is between 3 and 10 years with customized premises having a longer period. Tenants in residential premises usually stay for between 6 and 12 months. The cost associated with long tenancy is not only lower than short tenancy but also creates a more consistent income flow.
- No Outgoings: Landlords or owners of residential property are required to pay outgoings and rates to local authorities including the council and other utility firms. On the contrary, it’s the tenants who make these payments when it comes to commercial premises.
- Lowe Deposit: Pound for pound, the deposit required to lease a commercial property is lower than a residential building. For instance, owning a car park in a residential space such as a bed-sitter or studio may cost as much as $ 400,000 while a commercial tenant will pay approximately $ 80,000.
Why Investing in Commercial Property is Risky
On paper, investing in commercial property is the way to go for any smart investor, right? Well, there are some risks that come with choosing this option and most are connected to the economic conditions:
- More affected by the economy: In a thriving economy, the demand for commercial spaces will be high as investors try to maximize on the good fortunes. However, when the economy slumps, the demand for the property also dips within a short time this is unlike in residential property where the economic conditions are felt less.
- Finding a tenant takes longer: While most commercial tenants stay longer than residential ones, finding a new tenant for a vacant commercial building takes longer than in a residential property. At this point, the landlord will need to foot the outgoings and rates that were previously taken care of by the tenant. And the longer the premises remain vacant the harder it is for the owner.
- Easily affected by supply: An increase in the number of the buildings won’t really push the rental price down. However, commercial properties will be affected as the tenants look to expand or upgrade and will, therefore, be hunting for better alternatives.
- Higher costs of cleaning and repair: When a tenant moves out, the landlord will need to clean the premises and undertake repairs so to attract a new tenant. Unfortunately, due to their size and use, commercial premises usually suffer more wear and tear so the landlord usually ends up spending more when compared with residential property. It's also become increasingly common for landlords to include and pay for regular commercial cleaning services as a way of attracting tenants.
- Infrastructural changes harmful: although changing the infrastructure may attract new potential clients, it can push out existing ones. Owners of old property may lose their tenants who will be drawn by property near the infrastructure or running from the inconveniences associated with the changes.
- Sharp Declines in value: data indicates that the value and lease on a commercial property are correlated. When the rental charge decline so does the property’s value. This means that a vacant building or that whose lease is nearing expiration will be valued lower than that already occupied or the lease has been renewed. Such issues aren’t seen with rental properties and the price falls will be experienced over a long time. The changes will also happen gradually and won’t be influenced by whether the property is occupied or vacant.
This article was contributed by Simpo Commercial Cleaners
