When most people start thinking about property investment in Australia they usually think about residential property. As we highlighted in our last blog, more and more people with Self Managed Super Funds are using their super to buy investment properties. Investing in real estate is a popular way to secure financial stability and generate income. While residential properties have long been a go-to choice for many investors, commercial property investment offers a range of unique advantages. So what are your options for investing in commercial property over residential real estate and what are the main benefits?
What Do We Mean By Commercial Property Investment?
A commercial property is generally defined as one that is used for business purposes. This can include offices, industrial units, retail outlets or other specialty business operations such as pubs, hotels, service stations or medical centres. If it has the potential to generate profit, either through a capital gain or rental income, it can be classified as commercial real estate.
What Are The Options For Buying A Commercial Property
There are generally two options you can take when looking at investing in commercial property:
✅ Direct investment by purchasing a commercial property yourself.
✅ Investing in a commercial property fund, where you become a part-owner of the portfolio of commercial properties, along with other investors.
What Are The Advantages Of Investing In Commercial Property?
Regular and Stable Income
One of the primary benefits of commercial property investment is the potential for regular and stable income. Commercial properties, such as office buildings, retail spaces, and warehouses, typically involve longer leases compared to residential properties. These leases often span several years, ensuring a consistent stream of rental income. Additionally, many commercial leases include rent escalations, which allow for the rent to increase periodically, providing an opportunity for increased profitability.
Higher Rental Yields
Commercial properties tend to offer higher rental yields compared to residential properties. Rental yield is the percentage of income generated from rental properties relative to the property's value. With commercial properties, rental yields can range from 6% to 10%, depending on the location and type of property. In contrast, residential properties typically yield around 3% to 5%. These higher yields make commercial property investment an attractive option for those seeking better returns on their investments.
Longer Lease Terms
As mentioned earlier, commercial properties often have longer lease terms compared to residential properties. While residential leases are usually short-term, ranging from 6 to 12 months, commercial leases can range from 3 to 10 years or even longer. Longer lease terms provide investors with stability and reduce the risk of frequent turnovers. This allows investors to plan their cash flow more effectively and minimize the time and effort spent on finding new tenants.
Diversification of Portfolio
Investing in commercial properties allows for greater portfolio diversification. By adding commercial properties to your investment portfolio, you can reduce risk by spreading your investments across different sectors. Commercial properties encompass a wide range of sectors, including retail, office, industrial, and hospitality. Each sector has its own unique dynamics and can perform differently in various economic conditions. Diversifying your investments in commercial properties can help protect your portfolio from the impact of any specific industry downturn.
Potential for Commercial Property Value Appreciation
Commercial properties also offer the potential for value appreciation over time. Factors such as strong location, economic growth in the area, and demand for commercial space can contribute to an increase in property value. Although appreciation rates may vary depending on market conditions, investing in commercial properties in growing areas can lead to significant gains in property value, resulting in substantial returns on investment when the property is sold.
Professional Relationships and Networking
Commercial property investment allows investors to forge professional relationships with business owners, industry experts, and other investors. These connections can provide valuable insights, potential partnership opportunities, and access to a wider network of potential tenants and buyers. Building a strong professional network in the commercial real estate sector can significantly benefit long-term investment success.
Key Differences between Commercial and Residential Investment Properties
While both commercial and residential properties offer investment opportunities, there are several key differences between the two:
Purpose: Commercial properties are primarily used for business purposes, such as office space, retail stores, and warehouses. Residential properties, on the other hand, are used primarily for living purposes.
Lease Terms: Commercial leases are generally longer than residential leases, providing more stability and predictable income for investors.
Rental Yields: Commercial properties typically offer higher rental yields compared to residential properties, making them more attractive for generating income.
Tenant Responsibility: In residential properties, tenants are typically responsible for maintenance and repairs. In commercial properties, tenants often take on a larger share of the responsibilities, including maintenance, property taxes, and insurance.
Is Investing In Commercial Property Right For You?
While residential property investment remains a popular choice, commercial property investment offers distinct advantages that make it a compelling alternative. If you’re interested in investing in commercial property it’s vital to do your due diligence and understand the risks as well as the potential benefits. By understanding these differences, investors can make informed decisions and maximize their returns in the real estate market.
Before making any decisions, seek professional advice to ensure you understand the legal requirements, costs and risks associated with each option.
The information in this article is general in nature and doesn’t take into account your personal circumstances or financial situation. If you’re exploring ways to add commercial property to your investment portfolio, an experienced SMSF finance or business finance expert from CJG Finance can help you navigate the process.
To find out more about commercial property loans, contact us or call Colin at CJG Finance on: 0402 413 917 or email him: cgreen@cjgfinance.com.au
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