Some of you would have heard of the amazing result a couple of commercial properties recently had at Ocean Beach Road, Sorrento; they went for $1.3 million over their reserve, selling at $3.71 million. Last year one of the Main Street Mornington commercial properties went for $5.435 million to a Melbourne based buyer. Another sale last year saw a Chinese investor buy the Mitre 10 property at Sorrento at a whopping $11 million. Which brings us to discuss: Is investing in commercial property a better investment than residential property?

There are pros and cons to both, a few to consider are:

 

Commercial Property

 

Residential Property

Pros Cons Pros Cons
Rental returns are approximately 5-6% Harder to secure a lease Easier to secure a lease Rental returns are approximately 3.6%
Tenancy can be between 3-10 years with option to review Long vacancies High demand for rental properties Tenancy can be 6-12 months
Tenant pays outgoings such as rates, water and body corporate fees etc. Riskier as it is sensitive to economic conditions Stable returns You still need to pay the rates and land tax
Tenant invests in establishing offices, partitions and so on. Contract can state the premises need to be left in original condition GST applies when you buy a commercial property (see your accountant about claiming back an input tax credit) Considerable tax benefits If a rental property is negatively geared the investor needs to find the difference each month

Along with the above you also need a larger deposit to secure a commercial investment mortgage; lenders will offer a maximum loan value ratio of 70%. You will also find the interest rate on a commercial loan will be higher than a residential investment loan, this is a reflection of the difference in risk between the two options. Some commercial property purchase prices can be less expensive than residential properties and often this is an incentive to get into the market.

There is a great deal more understanding required to successfully manage a commercial property, so if you’re a sophisticated investor ready to do some due diligence this can be an exciting and profitable investment if you understand the risks involved.

We are also seeing an increase in commercial properties being bought through Self Managed Super Funds which allow for a number of tax considerations. Although this is a complex strategy with the support of professionals this can be a valuable retirement plan. Who can invest in commercial property? Individuals, companies, syndicates of investors and trusts can also purchase commercial properties.

While the risks associated with commercial property are higher than residential, the benefits can be significantly greater. To consider if commercial or residential investments are the right investment solution for you please seek professional help from your financial adviser who will liaise with your accountant, mortgage broker and real estate agent and assist in all the cogs working together to achieve your financial success.