There are two options available when looking to invest in real estate. The choice is between residential and commercial properties. The best choice is a point of contention for property investors and real estate professionals.
Which one to invest in can be a tricky decision. However one thing is for sure, when considering the advantages and disadvantages of each type, you should also how consider how each investment will fit into your portfolio.
We list some of the pros and cons of either type of property investment.
Higher returns on investment: The average rental return for residential property in Australia’s capital cities is around 3.6%. For commercial property, it is not unusual to get anywhere between 8 – 12%.
Longer leases: Normal residential tenancy turns over every 6 to 12 months, whereas a standard commercial tenancy can last anywhere between 3 to 10 years.
No rates and other outgoings: Landlords of residential properties are liable for paying council and water rates whereas commercial tenants pay these outgoings for the owner.
Property is sensitive to the economy: In a strong economy, businesses flourish and the demand for commercial property usually rises. In an economic downturn, this demand usually decreases.
Longer to find a tenant: It is not uncommon for commercial properties to have long vacancy periods. The landlord has to cover all costs during these periods.
Property value can drop sharply: The value of commercial properties closely correlates with the lease on the property. If a commercial property becomes vacant, or the lease is about to expire, the value of the property could well decline.
Taxation: Apart from the well publicised negative gearing options, considerable tax advantages exist. For example, if you own a property for more than 12 months you can apply the 50% capital gain discount when you sell.
Capital growth: Since the bank provides most of the funds to purchase residential property, you have considerable leverage and your capital growth returns can be substantial.
Vacancy rates: The vacancy rates for various types of residential property have been well publicised recently. In general, they are much lower than commercial property vacancy rates but you need to do your homework on things such as type of residence and location.
Costs: The costs associated with buying and selling are quite high for residential property. These include stamp duty, mortgage registration and agent costs.
Rising interest rates: Increases to interest rates will increase your repayments and decrease your disposable income. Although historically low interest rates exist currently, possible increases should be factored into your calculations.
Locality risk: Buying in the wrong area or location is a serious risk for residential property. Wrong location can significantly affect returns over the long term.
When it comes to making large investment decisions, there are often different strategies that should be investigated before committing. In terms of real estate, we would be pleased to help you model varying scenarios to ensure that you have plenty of information before making your decision.