Residential and commercial property share similarities such as the ability to generate relatively higher longer term returns - through rental income and the potential for long term capital growth - but there are also quite distinct differences. Let’s take a look at what’s involved.
A well-located house or apartment normally delivers regular rental returns, though landlords should budget for around four weeks of vacancy each year to be on the conservative side.
While the tenant wears some of the property costs related to direct usage such as water and electricity, it is the landlord who generally pays the majority of costs such as repairs and maintenance and insurance.
The upfront costs of residential property can be significant, with stamp duty, legal fees and optional costs such as pre-purchase pest and building inspections, potentially adding about 5% extra onto the property’s purchase price.
This is one reason why residential property is generally regarded as a longer term investment. It can take time to recoup those upfront costs.
Commercial property includes office buildings, warehouses and shops and is generally regarded as a higher risk asset than residential property. The trade-off is the potential for higher returns.
On the plus side, under a commercial property lease, it is normally the tenant who wears many of the ongoing costs such as council rates and maintenance.
The downside is that a commercial property purchase will attract the Goods and Services Tax (GST), as will rent, so be prepared to add 10% onto the cost of a commercial property purchase.
As an investor, you may be able to track down a property that fits your budget as a direct investor. However many commercial properties, such as large shopping smalls, mid-city office blocks and super-sized industrial complexes, are simply beyond the reach of many ordinary investors.
One solution may be to buy units in a managed investment investing in property. It can be a way to add further diversity to your investment portfolio, even if you have limited capital to invest.