Episode 23

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
    1. Office
    2. Retail
    3. Industrial
  • Rent to businesses

 

Commercial property to residential

  1. 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
  2. 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

  1. Fundamental driver for property growth – demand compared to supply
  2. Residential demand is driven primarily by population growth
  3. 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

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

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