When it comes to investing in real estate, most are deciding between residential and commercial property. While first-time investors are more likely to choose a residential property, more experienced investors are no doubt looking to expand their portfolios and are trying to decide what their next investment should be.
The key differences between commercial and residential properties
The key difference between commercial and residential is its intended use. A residential property is used as a home and a commercial property is a base for business operations.
Other differences include:
- Price
- Location
- Size
- Facilities/Features
- Council zoning and restrictions
Advantages of investing in residential property
Because of the more accessible entry point, most real estate investors begin with residential properties to start building their portfolios. There are plenty of other advantages that come with investing in a residential property, notable advantages include:
- Shorter vacancy periods: people will always need homes, as such if a tenant decides to move, finding a new tenant is quicker than finding a tenant for a commercial space.
- More lending opportunities: you can secure a loan on a residential property with as little as a 5% deposit and there are more mortgage loan options to choose from.
- Simpler lease agreements: as a lease agreement of a residential unit is not as complex as a commercial property, you will not need to spend so much on the associated legal fees.
The disadvantages
- Lower quality tenants: as there is little incentive for a tenant to maintain their rental home to a high standard, your investment’s condition could lessen greatly with each tenant. You may also have to encounter the varying behaviours and attitudes of your tenants.
- Higher maintenance costs: speaking of maintenance, when it comes to residential investments, the landlord bares the responsibility of covering the costs of the building’s maintenance and any repairs.
- Leases may end on short notice: whether it is out of personal finances, a career move, a family emergency or other reasons, a tenant may need to move on short notice, leaving you to look for a new tenant sooner than expected or at an inconvenient time.
Advantages of investing in commercial property
Many investors find commercial properties to be highly rewarding in terms of their return on investment. Here are some of the advantages of investing in commercial property.
- Longer leases: the average lease length for a commercial property is 3 – 5 years. Most agreements state that a tenant must pay out the remainder of their lease if they wish to end the lease early.
- Higher rental yields: due to several factors including property value, a commercial rental typically has a higher rental yield than a residential investment.
- Net leases: Commercial tenants pay a net rent, which means that they are paying for expenses such as maintenance, insurance, strata fees and more.
- Fixed annual rent increases: commercial rent has a fixed annual increase of 3-4%, a higher rate than the usual increase caused by inflation.
- Better diversity: investors typically start with residential properties, as such, delving into a commercial property investment leads to the diversification of their existing property portfolio.
The disadvantages
- More vulnerable to economic shifts: businesses are prone to the influence of the local and global economies. This can affect their ability to pay their rent and could lead to early termination if their situation is dire.
- Research and comprehensive understanding required: investors need to be well-informed before they can invest in commercial property with confidence. The properties vary greatly, and leases are far more complex.
- High Risk: for lenders, approving a loan for a commercial property is considered a high-risk loan. As such, they often require a deposit of at least 30% of the property’s value.
When it comes to investing in any sort of property, a valuation can greatly assist in a number of ways. Whether you order a residential or commercial property valuation, a report from a qualified professional can help you:
- Compare potential investment opportunities
- Calculate potential rental yield
- Negotiate the purchase of a property
- Review the rent and adjust it according to the current market
- Insure your investment property
- Secure a mortgage to finance your investment
To learn more about the services of a property valuer and how they can help you make the most of your next real estate investments, call our experts today.