Welcome to Finance and Fury
In today’s episode we’re talking about property - Commercial vs Residential.
It’s often a question people ask when they’re looking to start investing in property and considering which is the best type to get in to.
What is best to buy? Residential or commercial? What do you want to achieve? They aren’t the same beast – Whilst they’re both ‘property’ they aren’t really the same thing and behave quite differently
Residential Property
Homes or apartments Rent to individuals
Commercial property
Three different property types Office Retail Industrial Rent to businesses
Commercial property to residential
Pros Costs – Commercial can have lower costs Upfront – Technically cheaper per square meter than residential Ongoing – Tenants cop some of the costs (maintenance, etc.) Higher Rental Yields 8-12% on yields Residential has about 3-4% on yield Long leases Leases for 3-5 years are more common. Can go to 10 years. Provides certainty Cons Lower capital growth Supply and demand: If populations are growing (immigration) – prices go up Businesses aren’t growing in number at the same rate as residential Higher risk of vacancy – Often untenanted for long periods Got to have enough other cashflow to cover any costs on the property. Resale challenges Again, supply and demand Important to select property that will be demanded in the future – Rise of share office blocks Economic changes – Business don’t do well when the market is experiencing an overall decrease in demand. Residential property – you only have to look at individual demand – Places people want to live Commercial – Two-fold – Individuals need to demand business, and then business need to demand property Lending – lenders require 30%-50% deposits for property
Relationship for supply and demand
Fundamental driver for property growth – demand compared to supply Residential demand is driven primarily by population growth commercial demand is driven by both population growth and economic factors. Often in the ‘not so nice’ parts of town
It is important to understand these growth factors when deciding where and when to investment.
Risks No growth – Demand to buy doesn’t do up No income – Nobody wants to rent
Commercial – Works if:
Low maintenance Desired part of town for business to operate Strong cashflows
Residential – Higher capital growth – Plus more leverage
Summary
Residential – Good for long term growth – Leverage helps Commercial – Good for incomes – But has its risks