Why would you invest in commercial property over residential?
A variety of submarkets — including retail spaces and shopping centres, office space and industrial properties like warehouses — make up the commercial property market. It’s easy to assume these properties are beyond your budget, but they may be affordable depending on the size, location and type of property.
You could expect to pay some upfront expenses like legal fees when you invest in commercial property. You also pay goods and services tax (GST), which adds 10% to the purchase price. You can usually claim GST back as an input tax credit. But you’ll need to register with the tax office to do this. Don’t forget to include GST in your buying budget.
Commercial property can offer some attractive features too. Leases are usually longer than for residential property, often spanning five years or more. The tenant also tends to pay costs like rates and insurance. And investors may be able to earn higher rental yields than with residential property.
Commercial property is generally regarded as higher risk than residential property. That’s because commercial properties may experience longer vacancy periods. People always need somewhere to live, but demand for commercial property is linked to the economy. A downturn may see business confidence fall, which can flow through to commercial properties.
The location dynamics that make a successful investment also differ between commercial and residential property. Businesses might need access to transport links, a nearby workforce and proximity to other businesses that could meet their supply needs.
Financing a commercial property also works differently. Investment loans for commercial property share some similar features to residential mortgages. These include a choice between fixed or variable rates or between principal plus interest and interest-only repayments. But you may need a larger deposit of around 30% of the property’s value. In some cases, the lender could offer more favourable terms if you provide a residential property as security.
The golden rule is to invest in something you understand. This means weighing up risks and rewards to make an informed decision. It’s important to do plenty of research on the local market, vacancy rates and even council development plans. These elements could impact your investment’s success.