Should you be investing in commercial property?
Residential property investment is the go-to for many mums and dads looking to secure their retirement with a strong asset. If you already own your own home or have gone through the renting process yourself, it is a safe, comfortable and familiar way to build wealth.
However, residential property is not the be-all and end-all of investing in real estate. It may be unfamiliar territory, but purchasing commercial property could be an excellent way to start or expand your current portfolio. Let’s pull back the curtain on commercial property and take a look at how it could benefit the average Melbourne homeowner.
The initial costs
Buying property of any kind can be an expensive venture. Residential property in Melbourne can run you into the hundreds of thousands of dollars over the course of a mortgage, and even an initial deposit can be a severe impost on a mum-and-dad investor. Even if you choose to go for a cheaper unit, it may still take you some time to gather the capital required to take out an investment loan.
Commercial property, on the other hand, does not always have this kind of issue. If you are looking at buying a large retail space, you are of course going to have a larger price tag. However, commercial property is a diverse sector: car parks, for example could run you into the tens of thousands of dollars only rather than the hundreds of thousands.
Whether you have a lot of capital to spend or only a small amount of financing, commercial property likely has something within your price range.
But what’s the point of buying into any kind of property if you don’t get decent returns on it? The Commonwealth Bank predicts that leasing demand for commercial property in Australia is centred around two cities in particular: Sydney, and our own Melbourne. Our growing population, high employment rate and strong economy puts us in an ideal place for businesses to open – and those businesses will need premises.
While it’s perfectly possible to buy and hold commercial property, the real strength of building wealth in this way is the tenants that you will be dealing with, and their responsibilities. With residential property, a lot of the maintenance costs are placed upon you as the owner; with commercial property, the opposite is true.
The vast majority of expenses such as property management and council fees are paid by the commercial tenant, allowing you to take more of the rental money home rather than having to sink it back into the asset. Plus, because leases tend to be at a minimum of five years rather than 12 months, there is a level of consistency in commercial property you simply don’t get with residential tenants.
Like all investment, it does come with some risk.
However, these high returns do come with some risk. If you buy a house, you will find that the economy doesn’t have quite as large an effect as it does on, say, a retail space. The same can be said for infrastructure: the location of a new highway could divert a lot of commercial attention from your premises, hampering your investment efforts.
The tenant situation can also be difficult: while “blue chip” tenants like governments or large corporations can be extremely consistent with their payments, you may find that vacancy lengths between contracts are longer. Commercial property can be an excellent option for your portfolio, but like all investment, it does come with some risk.
This is why it is so important to make sure you speak with a commercial real estate expert, such as those at Nelson Alexander. If you want lower buy-ins, high yields, consistent tenants and fewer landlord responsibilities, you could well find that commercial property is calling for your investment capital.