This question I get asked regularly and often forms the basis of my strategy sessions.
Everyone’s circumstances are different and their reason for buying a commercial property over a residential will be too.
Some reasons when Commercial Property is WRONG for you:
1) You are early on in your portfolio
Commercial properties usually require a 20-35% deposit. While you have serviceability up your sleeve it is best to utilise it. In my opinion, leveraging is what makes property investing so powerful. So, if you can get 3x residential loans on 90% vs 1x commercial on a 30% deposit – you have the power to have a portfolio 3x as large! With capital growth, you can make a much better net return.
2) It does not suit your risk profile
Commercial property comes with risk, the main one being longer periods of vacancy. If you cannot financially handle these periods, then it may not be for you. You need to have adequate savings, buffers, and security in your employment.
3) You do not have the required capital
As commercial properties require a higher deposit the barrier to entry is much higher. You will generally need $100,000 as a minimum to get into a circa $300,000 property
4) You do not understand commercial property well
The stakes are much higher when buying commercial property. There are many more moving parts and ramifications if you get it wrong. If you buy a mediocre residential property in a mediocre suburb, long term you will be ok.
If you buy a poor commercial property and have long periods of vacancy this will also halt your future residential investing until it becomes tenanted.
Some reasons when Commercial Property is RIGHT for you:
1) You are getting towards your serviceability limit for residential borrowing
The high cash flow of commercial can assist with your serviceability because the income it generates is high enough to service the loan even with the banks shading criteria.
There are also types of loans that solely take the properties income such as lease loans and no-doc loans.
2) You need a passive income quickly
High yielding commercial property gives an instant passive income that standard residential property cannot.
One of these reasons is your partner could be going to part-time, on leave, or on maternity and the extra income will help dramatically. The other could be retirement – having commercial properties will be a much larger passive income compared with residential.
3) You are a business owner that is cash-rich but poor on paper to the taxman (you know who
you are! haha)
Business owners can get loans where they use a higher deposit to secure a property, the income of the property is enough for them to get the loan.
As you can see, there is a plethora of reasons when making a decision to buy a commercial property over a residential.
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Steve is a commercial property expert, buyers agent and author.
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