Most investors feel comfortable with investing in residential property since they are acquainted with it. The majority of us have leased a property, and a few people have purchased a house or unit, and understand exactly what that experience involves.
Commercial property, on the other hand, is a bit more mysterious, but is an increasingly legitimate investment alternative for buyers, especially in places likes Australia.
There’s a little more involved in commercial real estate sales, such as terms and conditions of commercial rentals, GST implications and who’s accountable for the outgoings (expenses) of the construction.
Here’s a breakdown of the critical risks and factors to take into account.
Commercial property comes in three major forms, office, industrial and retail.
Residential property investment is relatively low risk and as a result, low return. Industrial property has a greater yield, but this comes at a greater risk. By way of instance, a flat or unit will average a yield of 5 percent, whereas industrial land, like a warehouse, may average 8 percent.
The higher danger comes in the shape of higher vacancy rates. Let us use the warehouse case. It could take some time to discover a new tenant for the warehouse, many months and maybe over a year. Conversely, finding a new tenant for your residential property may only take weeks. Furthermore, if the sole tenant of your warehouse must close because of tough economic conditions, you could face some hard times. On the other hand, residential property may be resilient when it comes to economic variables over the long run.
The higher danger comes in the shape of higher vacancy rates.
Duration of leases
Residential leases are normally for six or 12 months. However, commercial real estate leases are generally for a much longer time period. It’s not unusual to have leases which are for a first five-year interval, with the choice to renew for another five years, most tenants stay in the one building for the life of the business.
Quality of renter
The tenant is obviously a vital part of your property investment. In commercial property, a government or large corporate tenant is known as a ‘blue chip‘ tenant. They are most likely to rent your house for a long time period and are not likely to default on the lease.
High price of entry
It is well known that the purchase of a residential property is usually cheaper than it is to buy a commercial property. CBD retail or office spaces are usually the most expensive area, because of its locality. Industrial property on the outskirts of town may also be expensive because of size of the property being bought. Prices, however, can minimised by buying a smaller strata title property.
Upgrading a residential property is comparatively affordable. A paint job, new floor coverings, kitchen and bathroom can cost as little as $20,000 to $30,000. Refurbishing a commercial construction, however, can be pricey.
New air-conditioning, updating the building to fulfil new health and safety standards and refits may cost 10s or even 100s of thousands of dollars. However, the prices are seldom borne by the operator. The costs usually fall on the owner, so before making any decisions, it would be wise to check out mortgage broker websites to see what your borrowing potential is.
One of the benefits of being an owner of commercial property is that the tenant usually pays the majority of the outgoings, such as council rates, insurance, repairs and maintenance, but to get a tenant to lease the building, you will have to do some fixes depending on the condition of your property.
However, after the initial fixes, all the costs fall on the person who leased the property, so all the rent you make is yours. Unlike with residential property, in which the property owner uses the rent money to pay for rates, taxes, repairs and maintenance on the house.
All the details of who pays the outgoings, how much rent is owed and how frequently it’s increased ought to be set out in the lease.
This is the most important document regarding commercial property. Unlike a residential lease that’s commonly a typical record and approximately four pages long, commercial rentals are often fifty or sixty pages in length, aren’t standard documents and generally require a solicitor to draw up them.
Read the Lease carefully and if you’re not sure of anything, ask a legal counsel to explain it to you. Before you agree to anything, look on broker websites to get some advice and make sure this is the best deal for you.