If you ever plan to be someone who builds a commercial investment portfolio then you have a lot to learn about commercial leases. Renting out your business property or creating offices around other businesses is important and there is a huge debate about whether it’s better for business owners to invest in residential or commercial properties. This is a big conversation that will long continue to divide investors but as a smart investor, you may not need to choose between the two.
As a smart investor, you just have to see how both of these investments can fit into your portfolio. Choosing is not an option if you have the ability to have a little from column A and a little from column B. There’s a lot for you to consider, from lease abstract issues to whether you buy and rent out or buy, upgrade, and sell. No matter what you do, you need to know your cash flow potential and that means figuring out where your highest return on investment is and going with that first. It’s not uncommon to earn anywhere between 8-12% gross yield for a commercial property.
So, why should you choose to invest in commercial property? Well, we’ve got a few reasons for you below!
You can go for longer leases. Did you know that a residential tenancy can go for up to twelve months at a time, compared to the years that you can include on a commercial lease? Having the option for a longer lease is a great thing for you because your money return will be much higher over time. You want to be able to earn as much as you can if you plan to have tenants and it’s a good idea to have a keen mix of both. That means looking at how you can extend to your tenants – both residential and commercial – the costs necessary to keep your capital going.
There are no rates. When you invest in different areas of commercial property you will find perks such as fewer outgoings. Residential properties come with rates that landlords are liable for paying for. If you’re a landlord of a commercial property, you should consider that you won’t have to worry about those. Why? Well, they’re built into the costs that your tenants have to bear. So the water rates, body corporate rates, and other liabilities are sorted by the tenants and their rent.
The deposits are much smaller. Did you know that you could buy a car park for as little as an $80,000 deposit? Residential properties are higher priced and that means you need a larger capital outlay. Investing in commercial property could be a good way to get into the market sooner and understanding the risks is vital.
Learn the risks of investment. Commercial property can look very attractive on paper and there are potential risks that every investor should be aware of. Commercial properties are those that are sensitive to economic conditions. When the economy is on the up, the businesses out there flourish and the demand for business properties falls, leaving the market wide open for you.
It can take a long time to find the right tenants. When you invest in residential property, you may find it hard to land the right tenants when your current ones are leaving. There are a lot of considerations when it comes to finding tenants, and you don’t have the same struggle with business tenants. Commercial properties generally attract longer leases of 3-5 years, and when these are signed you can bet that your tenants are more likely to sign for longer compared to residential ones. Residential tenancies that go for twelve months at a time also don’t earn as much as quickly. It’s common for commercial properties to have long vacancies, so you have to do more as a business owner to ensure that you keep your investment profitable. When you have costs to cover, you have to make sure that you have money in the bank to do it.
Commercial property is much more vulnerable to changes in supply. You will always have tenants in a residential property as people will always want to have somewhere to live. Commercial properties work a little differently as a low supply can change how many people are in need of your space. An increase in commercial properties to the market in the same area can really threaten your existing tenancies. A stronger supply can also reduce your potential yields.
Infrastructure changes can cause damage. Huge changes in your area can attract commercial investments. It can also lure tenants away and pull them from your commercial properties into new areas with new commercial options. This could result in a vacant property of your own and that can cause your financial swings to the negative.
Values change. Over time, as with anything, the value of your properties can change. The value of the property can correlate with the lease on the property and if the commercial property becomes vacant over time, or the lease is close to its expiration, then the value can be expected to fall down. This fall isn’t going to be great for you but it can be clawed back. Any price falls that come with residential properties are generally far less dramatic because they happen progressively over a longer period.
The question is then put to you as to whether you should buy commercial or residential properties – it all depends on you. Where are you now in your portfolio and what do you need? If you want to diversify the portfolio you have you can benefit from a cash flow injection at the same time. Commercial property could be an excellent addition to your current portfolio, but so can selling the one that you have and moving forward with another. All you need to ensure is that you are being diligent in your decision-making!
