Investing in property is an excellent decision for building a strong financial future. But what investment is best, residential or commercial? There are definite pros and cons for both, however the main point to differentiate is the risk that you can take up.
How risky do you think it is to start your own business?
Most people say, ‘pretty risky’, and for good reason. A large percentage of start-ups fail, and they do so for a number of different reasons, but at the end of the day the result is the same.
Now if I were to ask you how much return you could make by starting up your own business, most people would say, ‘a lot’, and they would also be correct.
This is the most fundamental part of being an entrepreneur, and indeed an investor of any market. Can I take on the risk of starting my own business knowing that if I fail I may lose everything, but if I succeed I may stand to gain a lot of money? We can extend this idea to investment in commercial property. The risk is higher, but the potential rental return is also high.
Why is the risk high?
Commercial properties tend to have long periods of vacancy. Business is largely dependent on the economy, so when a downturn is in effect commercial properties can be vacant for what may seem like a lifetime. During these periods the owner of the property must handle all of the outgoing costs, which can be detrimental for those who might not have the funds to keep the property going. Adding to this, commercial property does not historically make a lot of capital growth, so for return on investment, income from rent is where it will all likely be coming from.
For older investors with a large number of existing assets however, commercial property might not seem like a bad idea. Cash flow can be more desirable to capital growth for those who are looking at retiring, and periods of vacancy can be supplemented by cash flow from other investments, all the while waiting for a tenant who can offset any losses made during that period.
Why is return high?
Commercial properties have a number of benefits which make them desirable for investors. Rent is significantly higher than that of residential, and lease periods are also far longer. This means that once a tenant is secured, return is guaranteed for as long as the lease runs. On top of this, the ongoing costs of the property are typically paid for by the tenant. All of this is also supported by a higher depreciation rate, so rent can be discounted when paying tax. So not only are there fewer outgoing costs, but the income from a commercial property is also much higher than that of residential.
While commercial property might be lacking consistent tenancy during poor economic conditions, it can certainly make up for the fact with higher rental return and better cash flow prospects to residential property. If you are an investor with a number of existing assets, commercial property might not be such a bad idea, however consider the risks involved before you take the plunge into the commercial market.
If you are a business owner and renting your premises, why not consider buying the property itself using your super fund? If you want to learn more, give us a call!