It's Time to Invest – But Should we go Commercial or Residential?

KS130066 (Small)

This is perhaps one of the most common questions I get asked at barbecues, kid’s birthday parties, social events and sometimes even at work!

Sure each person’s circumstances and reason for doing things are different, however in considering the above question, the Pro & Cons for commercial investment are as follows:

Pro’s

  • Commercial properties generally return more as an investment with an expected annual yield range of 7-10%
  • Tenants usually commit to a longer tenure giving the owners piece of mind and security with their investment
  • Commercial leases contain “make good” clauses which places the responsibility on the tenant for ensuring the property is returned in a refreshed state.  Many leases require the premises be re-painted and re-carpeted prior to handing the property back to the owners
  • Commercial leases are usually net leases with tenants being liable to pay for outgoings (overheads relevant to the property such as council rates, water rates, insurance, land tax, building maintenance, common power etc)
  • Tenants even pay your management fees
  • Rent amounts have pre-determined increases written into the leases that occur annually
  • Commercial tenancies can value add a properties worth much more than a residential tenancy

Cons

  • Commercial property can have much longer vacancy periods.  In particular purpose built properties with special features can reduce the amount of potential tenants
  • Rent amounts can sometimes decrease if market rates and general economic conditions decline
  • Commercial tenancy failure can result in rent arrears much higher than that of residential property

So as you can see the pros far outweigh the cons, however there are some really important decisions to consider before making your decision which way to go. Ask yourself these questions:

  • Is the property specific to one industry and could not be altered without considerable outlay (some examples of these would be a laboratory, an industrial coolroom or a service station)
  • How long is the tenancy and what return is offered on the annual net rental income
  • Is the rent a net or gross return.  A gross return (rent including outgoings) are less desirable as in time as costs increase to hold the property, the increases are not paid by the tenant and thus the net return can decrease
  • Does the lease have a security bond/bank guarantee and/or personal guarantees
  • Does the tenant have a strong rental payment history
  • Is there development in the vicinity that may make your property hard to lease or retain tenure in the future

We are always happy to discuss and give our opinion on investment prior to making your decision, however we recommend seeking professional advice.

Regards
Jason Morris
Commercial & Industrial Specialist

Leave a Reply

Your email address will not be published. Required fields are marked *