Which is the Better Investment Commercial or Residential Property?

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Reproduced with permission.

News.com.au, 8th November 2012. Property Professor, Peter Koulizos, answers the following question. WHICH is the better investment – commercial property or residential property?

A: One investment is not necessarily better than the other but they are certainly different. It comes down to risk and return.

Residential property investment is relatively low risk and as a consequence, low return. Commercial property has a higher return but this comes at a higher risk. The major risk in commercial property is a high vacancy rate. In residential property, your property might be vacant for a week or two before you find a new tenant. In commercial property, it may be months or even years before you start getting rent from your next tenant.

Most commercial tenants are involved in business. Not only is rental income from commercial property dependent on the quality of the tenant (as it is in residential property) but it is also heavily reliant on the health of the economy. A healthy economy generally means healthy business and vice versa.

Buying commercial property is often much more expensive than buying residential property. If something goes wrong in your commercial property, you have much more money at stake.

Maintaining commercial property can also greatly affect your cash flow. Renovating a commercial property is not simply a paint job and new carpet. It may also require new air conditioning, refitting of the premises, upgrading of fridges/freezers, removal of asbestos, etc. These renovations are also relevant to residential property but they can cost much more when dealing with large commercial premises.

One of the main reasons people seek out commercial property as an investment is the higher rental returns. So far as residential property is concerned, a house could provide a rental return of 4 per cent and unit may provide a 5 per cent return. In commercial property, the rent situation is much better. A retail shop could be bought as an investment with a 6 per cent yield, an office property with a 7 per cent yield and an industrial property could provide a yield of 8 per cent. These rental returns are just a guide as some properties will have a much higher or lower rental return, depending on a number of factors, including location, quality of the building, quality of the tenant.

In summary, commercial property has a higher rental return than residential property but this is associated with a higher risk. One is not necessarily better than the other.

Happy House Hunting!

Written by Peter Koulizos, university lecturer, author and buyers advocate.

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