Commercial property presents good opportunities for investors. Picture: Grace Frost
In the world of property investing, commercial property has its own set of unique opportunities that sets it aside from residential property – but it may not be the best strategy for everyone.
WHO IS IT SUITED TO?
“I often find people get started after having an existing residential portfolio,” says REBAA buyers agent Zoran Solano from Hot Property Buyers Agency.
While residential property investing usually requires a deposit size of about 20 per cent, or possibly less with LMI, commercial property is different, says Solano.
“The barrier to entry with commercial property often requires a larger deposit – often 30 per cent or more depending on the style of the property,” he says.
Often, investors will use some of the equity they have built up from investing in residential property over time to fund the deposit for their first commercial purchase.
Demand for warehouses has been driven by a rise in online shopping.
BENEFITS OF COMMERCIAL PROPERTY
It’s a purchase that appeals to many residential investors because of its potential for stronger yield – both gross and net, Solano says.
“Often a lot of your outgoing costs as a commercial landlord are passed on to the tenants themselves, depending on the lease agreement,” he says. “Outgoings, even down to the rates, insurance and even land tax, potentially, can be charged to the occupant of the commercial property rather than the landlord themselves.”
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Buyers agent Steve Palise from Palise Property says commercial property tends to drive much greater returns than residential property when it comes to cash flow.
Hot Property Buyers Agency managing director Zoran Solano.
“Five years ago there were no books or podcasts about it. It was only known by business owners and high net worth,” Palise says. “Now that people realise you can get three times the cash flow and the same capital growth it is becoming popular.”
There is also the potential for longer lease terms, which can create more stable income, as well as higher depreciation tax benefits, he says.
POTENTIAL PITFALLS
But with any investment, there are also negatives – and risks.
“Vacancy is the biggest killer when it comes to the commercial property sector,” Solano says. “All we need to do is look at Covid in the last few years and how it’s dramatically changed the way people invest in commercial property.”
Vacancy rates rose in CBD locations as people relocated to home-based businesses during the pandemic. Industrial property has also seen a rise with the need for warehouses due to online shopping, he says.
Buyers agent Steve Palise from Palise Property. Picture: Tim Hunter
Investors need to have a clear understanding of who their tenant is and how stable their business is as well as wider economic factors at force, he adds.
“People can run reasonably large and successful businesses remotely or from home as well these days, so that is potentially a bit of a disrupter or a risk that commercial investors need to consider,” he says.
There are “more moving parts to understand” when investing in commercial property, says Palise, which means there are more things you might get wrong.
Commercial investing involves different types of properties with certain intricacies.
“There are also different types of property with their own intricacies,” he says, listing retail, industrial and office as three distinct examples. It’s also worth noting that zoning and regulations can change over time which makes it hard to forecast how your property will perform, he says.
“Commercial investing needs to be done only once you are educated or using a reputable buyers agent,” he says.
RESIDENTIAL VS COMMERCIAL
Steve Palise from Palise Property says there are several things that set residential property investment and commercial property investment apart. Here are some of the main differences:
* Deposit size – You usually need a deposit of 20-35 per cent for commercial property compared to a deposit of 10-20 per cent for residential property
* Yields – Commercial yields tend to come in at a much higher average of 5-8 per cent net, compared with the 3-6 per cent gross yields of residential, according to Palise’s calculations
Commercial investing usually requires a larger deposit size. Picture: Commercial Real Estate
* Lease terms – Commercial leases are usually much longer than residential leases, and can be as long as 30 years depending on the contract
* Outgoings – While the landlord pays most outgoings, such as repairs, renovations and council rates in the world of residential property, the occupant pays for a lot of these things in commercial leases
* Vacancy – Vacancies can be much more drawn out in commercial investing, as long as two years, while residential tends to be one to two weeks on average
* Cash flow – A lot of residential investments are negative to neutral cashflow while commercial investments can be highly cash flow positive
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