Before you look into commercial propertyinvestment, it’s important to recognise that there are considerable differences between commercial and industrial properties compared with residential real estate.
>The most common ones can be summarised as follows:
Commercial properties tend toyield a higher returnthan residential properties. That’s because professional investors require a higher rental return from their commercial properties to make up for the relatively weaker capital growth, the longer vacancy factors and potentially higher risks.
Leases for commercial properties tend to be for longer periods, often three to 10 years as opposed to the six or 12-month lease, which is common in residential properties.
Rents are usually charged as a rate per square meter and rent reviews are incorporated in the lease document. Rent reviews may be calculated every year or 18 months for example and can be an increase to market rental or an increase by the increase in the amount of the CPI. Some leases have a clause preventing the rent to drop even if the prevailing market rent drops.
Tenants in commercial properties usually pay all the outgoingssuch as rates, taxes and insurance, while with residential property the landlord pays these.
Because yourtenantconducts their business from your commercial property, theytend to look after it betterthan residential tenants do, usually maintaining and painting the property.
Commercial properties areless management-intensive– tenants don’t tend to bother you for small items like leaking taps.
Lenders will usually lend less for commercial or industrial properties. This means theinvestor needs to come up with more equity to purchase commercial.
Theinitial capital requiredto get in to a good commercial propertyis usuallyconsiderably higherthan that required for residential properties, as a good shop or office in a strong centre may cost two or three times the price of a unit or apartment.
Interest ratesfor a loan on commercial properties are usuallyhigherthan for residential properties.
When vacancies occur in commercial properties, they are oftenvacant for considerably longer periodsthan the week or two you may have a residential property vacant.
Thecycle for commercial properties is differentto that for residential properties and is even more dependant on the general economic factors than the residential market. COVID, for example, has made a lot of retail stores less desirable as online shopping takes off.
Theleaserequired on a commercial propertyismuch more complexand usually requires a solicitor to prepare it. Also court disputes over the lease are more costly and less clear.
It’s easier for you to pick a top-performing residential investment. Most beginning investors know what to look for in a residential property – they have lived in a house, but few would know what a tenant looks for in a good commercial or industrial property unless they have conducted their own business from one.