When it comes to real estate, not all forms of property investing are equal, with both commercial and residential property having their pros and cons.
It’s important than to know what you’re getting yourself in for with each before choosing either way, but it’s commercial property in particular that can be largely misunderstood.
What’s in a name?
When it comes to ‘commercial property’, the classification itself is a broad church.
“Commercial is a fairly encompassing term, looking at retail shops, through to office space, industrial warehouses and that kind of thing to food and beverage outlet,” Suburbanite principal Anna Porter told Your Money Live.
“It’s everything from a one or two person office all the way up to something that would house hundreds if not thousands of staff,” she added.
Residential, on the other hand, is much more clear cut, referring to a house or apartment in which someone lives.
The main distinction
The most obvious difference in terms of investments is income versus capital gains.
“Commerical is usually classed as a more income-producing asset than residential, whereas residential typically grows a bit stronger in most areas,” Porter explained.
Given the familiarity of most people with residential property, investing in commercial assets may come with a few unexpected shocks.
“The outgoings can be quite significant and that needs to be negotiated as to whether it’s the landlord or the occupant that is paying it and if that negotiation falls short it’s expensive,” Porter explained.
“There’s also a lot of GST applicable to a lot of leases that sometimes inexperienced landlords don’t realise and they can get caught out on that.”
The nature of it also means landlords can get stung on vacancy periods.
“Six to twelve month vacancy periods on commercial property are not uncommon and if you’re dealing with a really big space that might have a national tenant that can be drawn out even more,” Porter said.
On top of that, commercial property doesn’t come with all the legal tribunals of the residential sector.
“Every lease is through a solicitor or it should be so that’s another cost. Every change is through a solicitor and it really comes to commercial terms so it ends up in front of the lawyers if anything goes wrong,” Porter said.
So is it right for you?
Given the extra considerations, it’s certainly not for the faint of heart.
“Investors who are more savvy will do better in that space as will investors that are looking for an asset that will require higher engagement to some extent, something that is a bit more commercial in its terms and are investors that are happy to deal with lawyers,” Porter said.
Ultimately, if you can stomach those conditions and prize income over capital growth, commercial property might be for you.
Watch the full interview above for more.