We’ve all lived in a house, unit, apartment or some kind of residential property. Some people own a home (or at least have a mortgage) and many of us have also rented at some point in life. So when it comes to residential property investment and leasing, we ‘get it’ and if you’re a property investor, you probably feel pretty good about having a house (or few) in your investment portfolio.
Chances are that along the way you’ve seen a shop, office, warehouse, hotel or even a farm advertised as an ‘outstanding opportunity’. If so, you may have some questions. How does commercial property investment compare with residential property? Is it feasible for all property investors (like you, for example)? And if so, is it something you should do?
To get the answers to these questions, let’s hear what Cairns based commercial real estate expert Benjamin Farkas from Anue Commercial has to say:
It’s true that for many investors, commercial property feels like ‘the next level’ because it’s bigger, there are more dollars involved and the returns are higher. But to decide whether it’s right for you, it all boils down to risk versus return.
There are five main things to consider:
Residential real estate is cheaper in terms of total dollar cost, even though commercial real estate often costs less per square metre (except for pricey CBD office space). This is simply because residential properties are smaller, so it’s less square metres overall. So with commercial space you get more value per square metre, but the total cost is higher.
Commercial property has a few extra outgoings to consider, like electricity, security and base building maintenance. But if utility prices rise, it’s easier to pass on costs to the tenant in commercial than it is for residential property.
2. Rental / Lease agreements
Striking a deal with a residential tenant is pretty straightforward; all you need to agree on are variables like lease term, rental amount and bond. You may add some special conditions, but most of the common terms (or boilerplate) in a Residential Tenancy Agreement are standardised according to legislation.
Although there are some conventions in the commercial world, pretty much everything is up for grabs. That’s why negotiations and commercial lease documents can very, very long and complicated. They include things like fit-out incentives and ‘make good’ clauses that specify how the tenant should leave the property when they vacate. It’s a good idea to engage a leasing agent to help with this process; they’ll let you know if you need specialist property lawyers.
If anything breaks or goes wrong in a property that you own, of course you should fix it as soon as possible to keep your tenant happy. However, commercial tenants can be particularly demanding, especially if the fault is disrupting their business or costing them money. Imagine if the air conditioning broke down in a cinema in the middle of summer?
To protect yourself, it’s a good idea to have a professional property manager. Sure, it’s an additional cost. But they know how to play the game and they have agreements in place with tradies and security contractors that could end up saving you money.
What if your tenants move out and nobody jumps forward to take their place? You still need to make repayments and pay outgoings on the property, but you’re not receiving any income. The vacancy rate is one of the biggest risks in property investment. You can mitigate the risk by using an agent with the right real estate tools to keep your property occupied, but there are many factors that come into play.
Residential property wins on this front, with significantly lower vacancy rates than commercial. An apartment or house might be vacant for a few weeks before it’s rented but a warehouse, office or shop might be vacant for months or even years at a time.
This is mostly because the commercial leasing sector is more affected by the economic climate. A company will restructure or reduce their operations to consolidate space in lean times, but people always need somewhere to live. This makes residential property a bit more stable in terms of pure income.
Commercial property has the upper hand here, with returns typically about 6-8% and maybe even higher for a standout property. Residential returns usually sit around 4-5%, but on the flipside they generally cost less and the risk is lower.
So all things considered, which one is better? If only there was a magic answer… but there’s not. As with any investment, it depends on your financial situation, your personal financial objectives and of course your appetite for risk and return. Before investing in property (or anything else for that matter), get good advice, make sure you understand what you’re getting into and above all, don’t over-commit yourself.