Any type of property, whether commercial or residential can be a valuable addition to any investment portfolio. However, there are times when a commercial property investment can offer a range of benefits that residential property may not be able to provide.
Many investors consider the option of adding commercial property into their portfolio, but worry that there may be more risk involved compared to investing in a residential property.
Of course, savvy investors don’t choose between the two. Instead, a smart investor will consider each individual opportunity on its own merits, assess how it will fit within their portfolio, and how it will contribute towards their financial goals.
Before you jump into investing in commercial property, consider some of the pros and cons and how they could impact your investing goals.
Pros of Investing in Commercial Property
– Higher return on investment: The average rental yield for commercial property is often much higher than the rental return for residential properties. Many residential property investors may expect somewhere between 3% and 6% rental return, but commercial property investors may find that it’s not uncommon to see between 8% and 12% gross rental yield
– Longer leases: commercial tenants are often more willing to sign much longer leases, often between three and ten years. As the tenants are usually businesses, they’ve invested plenty of time and money customising the premises and building brand awareness in that location, so they want to remain for as long as possible.
– Fewer outgoings: landlords with commercial properties know that their tenants are responsible for paying the council rates, water rates and body corporate fees. By comparison, buying a residential investment property means the landlord is responsible for paying the same outgoing costs.
– More objective valuations: when a bank assesses the value of a residential property, they only take into account the potential resale value if the house was for sale on the open market. By comparison, a commercial property is valued based on the value of the premises, plus the potential income derived from the remaining lease.
Cons of Investing in Commercial Property
– Longer vacancy times: while you might be able to secure tenants willing to sign long-term leases, it can sometimes take a while to secure the right tenant. As a result, there is a risk that the property may remain untenanted until the right commercial tenant comes along.
– Niche market: depending on the type of commercial property you buy, it may mean the premises only attract certain types of tenants. As the market is limited for niche properties, you may find the property is vacant for longer periods of time.
– Vulnerability to economic conditions: most businesses tend to prosper when economic conditions are strong, but if the economy takes a downturn it’s increasingly likely that business tenants may also struggle. The result could mean the tenant goes out of business, leaving you with a vacant property.
– Professional maintenance assistance: commercial property investors know they can’t head onto the premises to get some quick DIY maintenance jobs done when things break. Instead, it’s important that maintenance issues are conducted by licensed professionals.
– Professional commercial management: managing a commercial property takes specific industry knowledge, so it’s important to pay the fees associated with engaging the services of a professional commercial property manager.
– More liability: commercial premises are intended to have plenty of people visiting them every day, which can increase the landlord’s liability risks. People can injure themselves within the premises or even in the associated car parking space. Likewise, vandals tend to target commercial premises that aren’t adequately monitored, so the risk of breakage or vandalism is increased.
Any smart investor will weigh the pros and cons of each individual property carefully before making a decision. It’s important to understand and assess any potential risks and then find ways to mitigate those risks in order to protect your investment strategy.