They might involve the same underlying fundamentals, but don’t be confused – commercial and residential property investment require two very different strategies
With tight vacancy rates and a severe undersupply of commercial real estate in many markets, now could be the time to extend your portfolio into this sector.
But in considering whether to enter the commercial market, you should bear in mind there are significant differences between investing in residential and commercial property of which you need to be aware.
Certainly, many of the ground rules of investing in residential property can be applied in the commercial market. Location, property type and price still remain crucial factors when selecting a commercial property.
The basic economics of supply and demand are also equally important in determining the future prospects of a commercial property investment.
There are, however, also subtle differences.
Tenancy and lease periods
As with residential investment, you will obviously receive rental income from your commercial tenant, but the tenancy period will usually far exceed that commonly found in residential tenancies.
This can be advantageous for investors looking to lock in a regular cash flow, but it might mean a longer commitment to your investment is required.
Commercial lessees will also be held accountable for costs of maintenance, rates and repairs of the property – which is sure to please any landlord.
It is important to note that the purchase of any commercial real estate will be subject to the goods and services tax (GST).
This means that when calculating the cost of your commercial asset you’ll need to be sure to add an extra 10 per cent on top of the purchase price.
Keep in mind though that the additional costs of GST can be claimed back as an ‘input tax credit’ against GST charged on any rental income you may receive.
Securing a loan
Funding your commercial property investment works in much the same way as securing a residential home loan.
You will have access to a wide variety of commercial loans and depending on your financial needs and investment strategy you should be able to choose from variable rate, fixed rate, combination of variable and fixed rate, principal and interest or interest-only loans.
The chief difference is that most lenders will require a 30 per cent deposit before funding your commercial investment.
This is significantly different from the more common 10 per cent deposit requirement associated with purchasing a residential property and something that will be a major influence on your purchasing capacity.