Commercial vs Residential Property

Keen investors contact us daily with queries about the property market. They are interested in where the markets are at, where they are going and where they should be investing. Along with these queries comes the question of whether to invest in residential or commercial property. We love both property types, but they have a lot of variables that set them apart as investment prospects.

Residential property is the most prevalent in Australia. If you’re a resident, you can’t help but be exposed to it. Everyone either lives in residential property, has renovated or will build their own in the future. The demand for residential property comes from our inherent need for housing and is tenanted by every day families.

Commercial property on the other hand, is a whole different genre. The performance of the asset is dependent on a rapidly changing economic landscape. Capital growth and rental performance are reactive to the wider economy, along with the availability of long term tenants (regularly in the form of businesses).

They are both tangible assets, they both require tenants and provide investors with a return. So, what is the real difference? Let’s do a quick comparison and you can judge for yourself.

  Commercial Property Residential Property
Bank Finance Banks require a deposit of 30% or higher to secure finance for investment purposes. Which can make the idea unfeasible to many buyers. Banks are less stringent in terms of lending criteria, regularly accepting 10% as a deposit. This also includes the ability to accrue mortgage debt with offset facilities (allowing for investors to service the loan easily).
Control Due to the high cost of prime commercial property, buyers often enter the market as part of a syndicate – resulting in the partial loss of control/ownership over the asset. Investors are able to operate as the sole owner of the asset – offering flexibility in selling, modifying and when selecting a tenant.
Vacancy Rates Commercial property is at the mercy of the wider economy and job market. This can lead to longer and more drawn out vacancy periods. A case study of this can be seen in the current Perth market, where vacancy has been fluctuating around 20% for 2 years. Well located and researched residential markets, offer high rental demand with low vacancies. Australia’s national residential market holds a vacancy rate below 2.1%.
Yields Commercial property achieves strong yields, as investors only pay for their portion of the property costs. National prime retail tenancy shows an average net yield fluctuating around 4-6%. Residential property provides strong yields. Often the apartment market offers higher yields than housing, with the owner covering the whole cost of property maintenance.
Leasing Periods Commercial tenants are regularly the combination of multiple businesses with long lease periods. To lease out these spaces can take months, with custom fit outs and services needed to meet the needs of the new tenant. Residential property can be tenanted, with new occupants moving in within a matter of days or weeks. These tenancies are regularly offered over 12 months.

Residential property is the focus for us here at Blue Wealth, it offers investors the ability to affordably leverage off premier markets while receiving strong returns. The property class offers flexibility to investors, who want to be the sole owner of an asset and hope to build a substantial portfolio.

Demand for housing is a constant in our society and will grow along with our population. In light of these facts, the case for residential investment is strong and it is our goal to highlight the best opportunities for our clients throughout the residential market.



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