Property investors often debate whether to go residential or commercial. There are far more residential buyers than commercial, however, partly because those who favour residential property typically have little experience in commercial property.
As everyone lives in some form of residential property, they feel they have a grasp of it, and it’s considered a human necessity – although commercial properties do provide the resources and services necessary for our survival. There’s also much more media coverage about people making money in the residential market, whereas commercial property is seldom spoken about.
About 70 per cent of residential property in Australia is owner occupied, and so the owners have an emotional attachment to it. By comparison, commercial property is typically bought as an investment and purchased based on the numbers and return, even if it’s going to be owner occupied.
Most commercial purchases are valued based on their rental return. In the residential market, a property must increase in value for the buyer to make a profit, but commercial property can create wealth even without capital growth.
A commercial property’s rent is often also indexed to inflation, which means the market will rarely move away from you.
In general, commercial net returns are much higher if you get it right, but can be riskier if you buy a bad property, as it could be empty longer. If you buy a bad residential property in a good suburb, though, you’ll generally be okay in the long term.
So, how can you decide whether commercial property investing is right for you? Let’s look at some of the key differences between the two, in the table following. (Note that the figures given indicative only – the exact numbers for a particular property will depend on factors like its location, type and versatility, and demand.)
When choosing whether to go residential or commercial – it is best to analyse what your end goal is vs your risk profile vs your capital / borrowing capacity.
Drawing a conclusion out from a property plan is the best solution.
There is no right or wrong answer, everyone’s circumstances are different!
By Steve Palise
Steve Palise is a commercial property expert, buyers agent, an author.
