18 Jan Investing in commercial property? Some things to consider…
If you’re thinking about investing in property, you may be considering investing in commercial property and if you are, we think you need to know what the pros and cons of this kind of investment can be:
The Pros Of Commercial Property Investment
Let’s take a look at the upsides of going into commercial property:
- Higher potential returns on investment. Recent CoreLogic RP Data suggests that while rental returns for residential properties in major cities in Australia is around 3.6%, commercial property can see 8-12% rental yields.
- You might arrange longer leases. Commercial property tends to have a lower rate of tenant turnover. Businesses typically sign 3-10 year leases compared to the 6-12 month leases of residential properties.
- Tenants take care of other outgoings. You won’t pay rates on a commercial property, they’re the tenants’ outgoings.
- Lower deposits. In general terms commercial properties tend to be cheaper than residential properties and that can mean smaller deposits because you’re paying less in total.
The Cons Of Commercial Property Investment
It’s important to note that commercial property investment does come with real and appreciable risks:
- Economic conditions are paramount. When the economy goes through a downturn, commercial properties can become very difficult to lease. On the other hand, when things are booming demand is substantial.
- Tenancies may be vacant for much longer. Residential properties, as long as they’re in decent areas, are generally fairly easy to fill when the property is maintained well. Commercial properties are not so easy to fill and gaps of a year or more are not unknown between tenants. That means during those downtimes – you’re going to have to pay the mortgage yourself and any other costs associated with the property.
- More vulnerable to increases in supply. If an area suddenly sees a lot of new commercial infrastructure come on to the market; it can have a huge impact on existing properties. Which can become more difficult to let and can see a reduction in rents as aspirational businesses move up in the world.
- Infrastructure can add value or take it away in a heartbeat.A change in road layout, the opening of a new school, any infrastructure change has the ability to either increase demand in your location or kill it off.
Property values can go up and down like a yo-yo. A residential property doesn’t need a sitting tenant to have value but a commercial property may. In fact, a commercial property with a tenant coming to the end of their lease will be worth much less than a commercial property with a brand new tenant.
Overall Commercial property investment is not for the faint-hearted. Yes, it can bring higher rewards than residential property but yes, it is also much more risky. We’ve found that people tend to invest in commercial property when they are looking to diversify an existing property portfolio rather than to make their first move into the market.
If you’re considering investing in property and you need a loan to get things moving –call us and let’s talk about your options.