Commercial vs Residential Property Investments

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Investing in commercial property is a great way for people who want to diversify their portfolio with real estate. When you invest, be sure to work with someone who has the professional expertise necessary to help you make sound investment decisions. They can tell you if your potential property purchase will generate enough revenue or not and what kind of tenants, they’ll have access to!

This way there are no surprises about rental income when it comes time to start making monthly payments on their investments! If you’re looking to invest in commercial property, then it’s important that you know what to look for. There are many different factors that will determine whether or not an investment is worth your time and money.

If you’re confused about where to start, this blog post will give you a clear understanding of commercial property vs residential, pointing out some of the key aspects of commercial property investing and how a property valuer can help to make a decision on whether or not you should buy a particular building.

What is Commercial Property?

Also called commercial real estate, is known as any non-residential property that can be used for profit-making purposes. Commercial property can be divided into three main categories: retail, office, and industrial real estate.

As an investor, you are always looking to diversify your portfolio of investments or maybe looking for an increase in cash flow, whether it be for commercial or residential purposes.

To have a successful investment with your commercial property it is required that you have an advanced understanding of the different market segments (such retail, office, etc) as well as a broader market knowledge like economic, interest rate trends, financial requirements, and property management options. Having this knowledge will give you a good grasp of any potential risks that you may encounter along the way.

Commercial vs Residential Property

Before you decide to start your investment journey into commercial/industrial real estate, you need to recognise that there are considerable amounts of differences between commercial and residential property.

Commercial Property Factors:

  • Higher Yield Return – investors require a higher rental return to make up for a decrease in capital growth, longer vacancy, and potentially higher risks.
  • Longer Lease Periods for commercial- 3-5 years as opposed to 12 months with residential.
  • Rent Reviews to be calculated yearly as the market rental fluctuates, many leases have a clause to prevent the lease amount to decrease even when there is a decline in the rental market.
  • Out-Going Costs are the tenant’s responsibilities- rates, taxes, and insurance.
  • The Initial Capital required is higher than that of residential property usually 2 or 3 times the price.
  • interest rates for a loan are higher than that for residential

Benefits of Commercial Property

  • Stronger Returns
  • Income Stability
  • Low Risk
  • Access To Various Sectors of The Economy
  • Tax Benefits
  • Control Over Your Investment
  • Adds Value (renovations or redevelopment)

Drawbacks of Commercial Property

  • Lack Of Liquidity- (can take months if not years to sell)
  • Higher Costs
  • Ongoing Management
  • Lack of Information as a New Investor

Why a Commercial Property Valuation is Important?

When it comes to the investment of commercial property, having an insight into the true value as well as the market research of the property prior to buying or selling will give you a head start into your investment journey as well as being sure if the decision you are making will benefit your financial position and success in the near future.

Residential properties are much easier to value compared to commercial real estate, this being that finding a comparable for a commercial building is a tedious task. Hiring an independent property valuer, that is experienced in all commercial-related purposes, the property valuer will utilize their extensive knowledge of the industry, as well as the access to all market data analysis to accurately determine the value.

There are three methods a valuer will use to complete your commercial valuation:

  • cost approach – used to calculate the property value, finding the comparable of commercial buildings is very difficult. In this method, the valuer finds what will be the cost with a building similar to yours, to help determine the right value.
  • sales comparison approach – a comparison made between the subject property and its comparable, these comparable are the property that has been sold in recent months in the area.
  • income capitalisation approach – three methods- Income generate, capital ratio and value of the property. The value is then determined with the income from the building to the capital ratio.

 Identifying the right commercial real estate investment is no easy task, research and consider the different investment structures available. Whether its commercial or residential property, this investment will be the big asset you own, seeking advice from a certified professional is highly recommended.

When you hire a property valuer you are ensured that the service you receive is tailored to your property-related requirements and guaranteed that the valuation report you receive will be detailed at the highest of standards. Start your journey to success today!

Author bio

Henry Rivers – LinkedIn profile

Henry Rivers is one of our top leading valuers, both registered and certified with the Australian property institute (API), with upwards of 20 years’ experience working in the Canberra property market. Henry’s expertise spans across all property types and purposes e.g., residential, commercial, and industrial property.