Pros and cons of buying commercial property over residential

No matter where you turn, it’s impossible to miss the fact that Australia’s residential house-prices have skyrocketed to new and unattainable heights, with recent reports demonstrating that the median house price has risen by 24%, or $1,200 per day over the second quarter of 2021. When it comes to the Great Australian Dream of home ownership, many Aussies are being priced out and are thus being forced to turn elsewhere to invest.

As a leading commercial property specialist, I believe that now is the perfect time for Australians to reconsider their residential property plans and instead turn to commercial real estate – an area that is largely untapped, yet offers tremendous opportunity for Australians to increase their income three times as fast. And while the commercial property sector has also grown significantly over recent years, it can truly be the secret weapon Australians can use to build million-dollar property portfolios in the shortest amount of time.

So, when it comes to the pros and cons of buying commercial over residential property, here are the top things I tell my clients when I’m helping them grow their portfolio:

PROS

• TENANTS PAY YOUR OUTGOINGS

Unlike residential property where the landlord is up for all the fiddly additional costs including strata, electricity, water, land taxes, etc., in commercial property, all these costs are covered by your tenants. Yes, it does sound too good to be true, but this is a hidden benefit for going commercial. The tenant pays for most outgoing costs, meaning as an investor, you don’t need to dip your hand into your own pocket when large bills are due. The tenants pay their rent; you pay the bank what you owe, and the rest is kept as passive income, which ultimately means more money flowing to your bank account each month.

• YIELDS ARE HIGHER

Compared to residential, commercial yields are higher. On the same $1 million property in Sydney – you would get a two-bedroom apartment with a rental of around $600 gross per week. After removing the outgoings and mortgage, you end up being negatively geared. However, in Commercial the same $1 million investment would be giving you around 5% - 7% net before mortgage, and around 2.5% - 4.5% after mortgage, which means there’s money in your pocket from day one. Having additional cash flow means that you can support your current residential portfolio or have additional income to support your household.

• YOUR CAPITAL GROWTH CAN BE HIGHER

The common myth in the market is that there is no capital growth in Commercial property…. However, I recently sold my very first commercial property in June 2021 for $1.05 million, having originally purchased it for $360k back in 2012. All the time getting positive cashflow whilst I held it and recouping the capital gains at the same time. Bought right, a commercial property can produce the same capital gains that if not the same, can be higher than residential as the area changes.

CONS

• You Might Have to Give Up on the Australian Dream

In Australia, we are obsessed with the idea of owning our residential properties, so it’s very hard to give up on the Great Australian Dream to pursue commercial instead. You will never get the opportunity to live in your purchase, however you can use the capital that you build with your commercial investments, to help you get your foot in the door with a residential property somewhere down the line.

• There are more negotiations involved

Finding and settling on a commercial property investment can be quite an endeavour and it is not recommended that Australians try to do it on their own without any education. Some deals and negotiations can last years as you work with vendors, buyers, banks, councils and so on, until you can actually sign on the dotted line. It’s important to understand that if you want to invest in commercial property, it’s definitely a long game.

• Tenancy Complications

As the past two years have taught us, sometimes global crises or issues occur that force many commercial businesses to close their doors to the public. And as a result, there is a risk that your tenants may either request reductions in rent or vacate the property altogether. While there is no way to guarantee how your tenants might react to external issues, the best way to safeguard yourself in commercial property is to buy premises that are diverse and multi-purposed, meaning it can adapt into retail, essential services, hospitality and so on! Since the pandemic there have been tenants and businesses that have survived better and flourished more than others. Not all tenants are the same. Don’t let your preconceptions ruin a good commercial deal. There are a lot more evergreen tenants now than there was before.

When it comes to starting your commercial property journey, it is paramount to seek an expert for assistance, as there are many additional considerations to be aware of before making a purchase. For more information about how you can get started on your commercial property journey, visit: https://helentarrant.com/

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