Commercial v Residential Property; the pros and cons if you're considering investing

Welcome to Finance and Fury 

In today’s episode we’re talking about property - Commercial vs Residential.

It’s often a question people ask when they’re looking to start investing in property and considering which is the best type to get in to.

What is best to buy? Residential or commercial? What do you want to achieve? They aren’t the same beast – Whilst they’re both ‘property’ they aren’t really the same thing and behave quite differently

 

Residential Property

Homes or apartments Rent to individuals

 

Commercial property

Three different property types Office Retail Industrial Rent to businesses

 

Commercial property to residential

Pros Costs – Commercial can have lower costs Upfront – Technically cheaper per square meter than residential Ongoing – Tenants cop some of the costs (maintenance, etc.) Higher Rental Yields 8-12% on yields Residential has about 3-4% on yield Long leases Leases for 3-5 years are more common. Can go to 10 years. Provides certainty Cons Lower capital growth Supply and demand: If populations are growing (immigration) – prices go up Businesses aren’t growing in number at the same rate as residential Higher risk of vacancy – Often untenanted for long periods Got to have enough other cashflow to cover any costs on the property. Resale challenges Again, supply and demand Important to select property that will be demanded in the future – Rise of share office blocks Economic changes – Business don’t do well when the market is experiencing an overall decrease in demand. Residential property – you only have to look at individual demand – Places people want to live Commercial – Two-fold – Individuals need to demand business, and then business need to demand property Lending – lenders require 30%-50% deposits for property

 

Relationship for supply and demand

Fundamental driver for property growth – demand compared to supply Residential demand is driven primarily by population growth commercial demand is driven by both population growth and economic factors. Often in the ‘not so nice’ parts of town

 

It is important to understand these growth factors when deciding where and when to investment.

Risks No growth – Demand to buy doesn’t do up No income – Nobody wants to rent

 

Commercial – Works if:

Low maintenance Desired part of town for business to operate Strong cashflows

 

Residential – Higher capital growth – Plus more leverage

 

Summary

Residential – Good for long term growth – Leverage helps Commercial – Good for incomes – But has its risks