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