The way the Sydney housing market is at the moment, it’s become increasingly difficult to find investment properties that provide a decent yield. In order to find high yielding properties you generally have to sacrifice on capital growth. The highest yielding properties are found in regional areas where growth is slower than the capital cities, so for investors wanting to stay close to where the action is, commercial property could be an interesting alternative. Experts are predicting that office, retail and industrial property could be a great opportunity from now and into 2016.
Interested to find out more? Let’s take a closer look…..
These days it’s hard enough to find a rental return of 5%, let alone anything above that. But it’s not uncommon for a retail property to earn 7%, an office 8% and in some cases 10% for an industrial property. But of course returns do vary dependent on factors like the location, quality of the building and access.
So what are the differences between a residential and commercial investment property? Firstly there are the costs. With residential property the owner pays council and water rates, repairs & maintenance. However with a commercial property the tenant can pay these, meaning a lesser proportion of the rental income is spent on costs and more goes into the investors’ pocket. The other difference is that commercial leases predominantly go for between 3 and 5 years. A longer term tenant, means more security and provided you’ve allowed for good rental reviews in the lease, a high return is achieved.
So if the yield is higher and the ongoing costs are lower why isn’t everyone investing in commercial property? Well firstly, it’s not an investment for everyone. If you buy the type of house or flat people want in a populated area, present it well and fix things when they break you are pretty much guaranteed to get a tenant. After all, people need to live somewhere. But with commercial property there is a real risk of vacancy. Many a row of shops has gone out of business thanks to a Westfield opening up down the street. It may take up to a month to find a residential tenant, but with commercial property you can find your space empty for extended periods of time. New businesses don’t open when the economy is struggling so you are far more susceptible to influences outside your immediate control.
It’s not enough to be knowledgeable about residential property to purchase a commercial property. It’s a completely different ballgame and shouldn’t be tackled without the assistance of an experienced team. Contracts are more complex, leases can run for much longer periods and you need good legal and accounting assistance behind you to make sure you’re not making a costly mistake.
If capital growth is what you are looking for you can’t beat residential investing. But if you’re looking for some serious cash flow, or diversity in your already existing portfolio commercial property may be worth a serious look.
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