You’ve decided on property investment, what type of property will you invest in? Residential property seems more accessible, while commercial property is famous for yielding massive returns. In this article, we will discuss the merits of commercial and residential property investment, so that you can make an educated decision.
Commercial property is traditionally more challenging to purchase. Not only are banks more demanding in their requirements – expect a significant deposit or equity investment – but also, entry costs are usually much higher. If you manage to find a commercial property with a lower entry price, it’s likely that there is a reason it is being offloaded; consider if rent levels are viable and gauge demand, including existing covenants, before making a decision. Residential property, on the other hand, offers easier access for most people as the deposits are lower and with fewer requirements for entry.
While residential property adheres to traditional legislated tendencies; six or twelve-month agreements between a tenant and landlord, commercial contracts are usually much longer. For industrial tenancies, a ten-year deal is not uncommon and even smaller businesses, such as café’s and small business offices, have 5 x 5 arrangements. This means that an agreement is put in place for five years, with an option for the tenant to renew for a further five.
History is a difficult thing to quantify, mainly because the rules of the past may no longer apply. Political upheaval, financial downturns, and evolving markets have meant that all markets, including property, can be volatile and less predictable. Commercial property is known to be more volatile, less predictable and much more prone to failure than residential property. In fact, studies have shown that commercial property, when measured over an extended enough time period, is unprofitable. Of course, this is balanced out by two factors: firstly, no notable study has been completed on residential property as a whole, and secondly, the commercial properties remain in existence, despite the owners yielding a net loss.
Safety, perhaps, should be the deciding factor when it comes to this age-old argument. You see, the decision as to whether to choose residential or commercial property should not be based on a simple comparison between two investments. Instead, the investor should look at their existing portfolio (if applicable), long-term goals, and hedging plans. For the uninitiated, a hedging plan is a strategy to survive, and thrive, in times of economic uncertainty.
Residential property presents a unique opportunity. Investors can gain access to the market with a limited amount of capital or equity, while keeping their options open for other investments. Additionally, a relatively stable history of growth shows that residential property is one of the safest investments in Australia, if not the world.
Commercial property has created multi-millionaires and billionaires, but it’s important to note that these investors are the exception and not the rule. Being a commercial property investor does not instantly make you successful, and as with any other industry the “elite,” are unique amongst their peers.
Start small and trust your intuition. By beginning your investment journey with residential property, you can learn while you earn; build a portfolio without the need to service a potentially costly tenant. The comparison should be between making a consistent income, and hoping for the best – take a gamble when you have a powerful hedge in place to cover your losses in the event of your commercial investment not yielding the results you expect.
Dream Design Property (DDP) is a unique wealth creation mentoring program that is designed to help Australians gain financial freedom, offering each client an ongoing personalised service catering to their changing circumstances and needs. DDP has helped purchase over 1,000 properties for its clients.
For more information please visit //www.ddpproperty.com.au/contact.html
Zaki Ameer | Founder | DDP Property