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Residential vs Commercial Property Investments – What’s The Difference?
Whether you’re new to property investments or you’ve invested in residential properties in the past and are now ready to buy a commercial property, this guide will give you an overview of the differences between the two types of investments.
What is a commercial property?
A commercial property, or commercial real estate, is a piece of land or building that is used for activities that generate profit, rather than residential purposes.
What are the benefits of buying a commercial property?
It’s often said that residential property investments come with fewer risks. While that might be true in some instances, there are plenty of reasons for investors to choose to buy a commercial property:
Higher rental yields
The rental yield is the profit you make from the property, it’s the difference between your costs and the income (rent) that the property generates.
Rental yield for commercial properties is higher than residential properties. Overall, rental yield is one of the main aspects of a property that you should consider when comparing commercial properties for sale.
Because of higher rental yields, commercial properties are more likely to be cash-flow positive than their residential counterparts. Moreover, commercial properties can count on fixed annual rent increases, as discussed further down this guide.
Commercial leases are on average much longer than residential ones. That’s because finding a tenant for commercial properties is more time-consuming than finding a new tenant for a house or apartment.
Tenants that care
Because commercial properties are used to host and run businesses, tenants tend to give great care to the upkeep of thr property.
Low maintenance costs
Tenants often sign “net” commercial leases, meaning that they commit to taking on any strata fees, maintenance and repairs costs, and other property outgoings. This is unusual for residential properties, but it’s the norm in the world of commercial properties.
Locked-in rent increases
One of the great benefits of buying a commercial property is that commercial leases often include locked-in annual rental increases (between 3-4%). If the percentage of increase is higher than the current level of inflation, your annual gain will be significant.
How to buy a commercial property?
Unlike residential properties, buying a commercial property requires more business acumen and due diligence. Here’s why:
Commercial properties are subject to changes in the economic landscape. Sudden changes in the economy, for example, might cause your property to be vacant for a longer prior of time
To purchase a commercial property, you need to apply for a business loan – which is different from a normal home loan. They require a higher deposit, usually around 30%, and interest rates and fees are higher.
On average if you’re investing in commercial property, you need deeper pockets than the average residential investor.
However, commercial investments come in all shapes, sizes… and prices. Multimillion-dollar investments might be out of reach for most, but there is plenty of more accessible options such as office spaces for $400,000 or parking lots for $100,000!
It’s often said that commercial properties have a lower capital growth than rental investments. Many agree to disagree on this topic, but it’s definitely something you should keep in mind if you’re interested in learning more about how to buy a commercial property.
The value for residential properties is linked to potential for capital growth, because they have a high potential, and because rental yields are not as important when owner-occupier buyers and investors are interested in the same property.
For commercial properties, the value is calculated based on the ROI from the tenanted property. If you’re companies commercial properties in Perth, start by calculating the rental yield and comparing them.
Interested in buying a commercial property in Perth?
Read our 8-pages guide to commercial real estate investment or contact Ross Scarfone today.
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