One question that often divides property investors is whether commercial or residential property makes the better investment.
Like everything in property, it depends! It depends on your financial situation and what you’re wanting out of your property. Those who invest in residential property believe it’s less risky, however, those who invest in commercial often argue it’s got better cash flow potential.
While everyone needs a place to live, for those looking to invest in commercial property there are a few other factors to consider.
If you’re thinking of which is best for you, here are some of the pros and cons to investing in commercial.
- The potential for higher returns on investment.
Commercial property usually attracts between 6-10 per cent gross rental yield while residential often sit at less than 4 per cent per annum
- Longer leases
Commercial property leases can be anywhere between 1 and 10 years. Residential are usually up to a year at a time.
- Fewer outgoings
The business usually plays the council, water and body corporate rates.
- Commercial property can be cheaper for still reasonable returns.
- Larger deposit needed
If you’re borrowing money for a commercial property, banks usually require a 20 – 40 per cent deposit or the equivalent against another property.
- Usually longer to find a tenant
The investor will need to budget for potentially longer vacant period
- Sensitive to economic conditions
A downturn in the economy means there will be a downturn in business, which could mean a downturn in the demand for commercial lettings.
- Can be affected by changes in infrastructure
Major infrastructure changes in nearby areas can lure tenants away to newer commercial centres or buildings.
Commercial property does offer some fantastic investment opportunities, and we know investors who diversify their portfolio by investing in both residential and commercial.
However, just like investing in residential property do your homework. Find out about the area and get to know the commercial market. While there are some great bargains to be had, you need to fully understand the type of tenants you’ll be attracting and really know what’s planned for the area.
Talk to your financial advisor and other professionals so you can fully understand the risks involved.
As one of Newcastle’s longest established real estate offices, we’ve helped hundreds of people realise their financial dreams through both commercial and residential property. If you’re interested in finding out more, get in touch by giving us a call on 02 4954 8833.
Or send us an email to firstname.lastname@example.org or pop into our Cardiff office for a chat.