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Pros and cons of commercial property investment

Many investors see commercial property as a positive cash flow property. It’s true to a large extent. But commercial property investment also has some risks. Let’s run through the major pros and cons that investors should weigh up before outlaying any capital.

Pros

• Stronger returns

According to recent figures from CoreLogic RP Data, average rental yields are between 3% to 4% gross for residential real estate in Australia’s big cities. Commercial properties, on the other hand, frequently earn between 5% and 10% in net rental yield. 

• Less lease turnover

Turnover of residential tenants can occur every 6 months. In contrast, commercial tenants usually stay for 3 to 10 years, especially if they’ve put money into customising the property.

• Commercial tenants pay the bills

Whereas residential property owners are responsible for paying water rates and council rates, commercial tenants in most scenarios pay all the outgoings (subject to lease agreement conditions). 

• Less capital outlay

Commercial real estate is usually cheaper than residential real estate, due to the ranging types of Sqm2 and properties. Deposits are comparatively smaller as a result (due to the ranging prices). For instance, a car park could be priced at $80,000 (only an example, not a suggested investment), while a one-bedroom flat might cost $400,000. For investors, commercial property investment can be a shorter route for getting into the property market. However, keep in mind certain loan to valuation ratio’s (subject to a range of factors) could change the deposit requirements.

Cons

• Longer vacancies

Although leases for commercial premises are usually longer, if the property becomes vacant, it can take a while to find new tenants. The property owner is responsible for covering all the costs of a vacant property. All of us need a roof over our heads, but not all businesses need a property to work out of.

• Dependent on infrastructure

Key infrastructure such as roads and transport links have a huge impact on the success of commercial properties. Changes to infrastructure can suddenly make tenants vacate a commercial property that was once a reliable location.

• Values tied to lease cycle 

The lease on a commercial property largely determines its value (although there are other factors too). A vacant property can have a lower value, as will a property with a lease that is soon to expire. This is less of a problem in the residential property market. However, on the flipside under market rents with increased rents in the future, or just rental increases in general could positvely shift values too.

So how can you know which commercial properties are worth investing in? At InvestorKit, we provide investors with a full service that includes researching and identifying quality property investments. With our team of experienced professionals, let us help you find the right properties for capital growth and high yields. Contact us today to find out more by booking in a FREE STRATEGY SESSION.