The Advantages of Investing in Commercial Real Estate
In Melbourne, real estate remains a popular and profitable source of investment. It’s a secure and relatively stable asset that consistently delivers returns for investors.
While residential property tends to get the most coverage when talking real estate investment, there is an alternative real estate asset that doesn’t get discussed nearly as much. Commercial real estate can offer higher returns and longer-term security than residential real estate. However, for novice investors, it can also be a more difficult asset class to break into and manage and the risks can be higher.
Benefits of Commercial Property
There are plenty of advantages to investing in commercial real estate, so let’s have a look at a few.
Higher yields and better cash flow
Perhaps the primary reason why commercial real estate is so appealing is the higher rate of return compared with residential assets. In general, commercial properties will offer a much higher yield than other asset classes.
Property yields –that is, the rate of rental income relative to the amount for which a property is initially bought – can be as high as 12% for commercial properties. Compare that with between 3% and 5% for typical residential properties.
It’s worth bearing in mind that yields will differ depending on location, supply and demand. Yields can be higher outside of major capital cities (in areas like Geelong, Bendigo and Ballarat, for example). However, demand for these properties may be lower than in capital cities like Melbourne.
Locked in rent increases
Lease agreements for commercial real estate usually include annual rent increases. This means that landlords don’t have to negotiate with tenants each year to ensure the rental yield keeps up with inflation.
Low maintenance requirements
Commercial real estate will generally require less maintenance work than residential. Since these properties are generally places of business, tenants have a vested interest in keeping them in the best possible working condition. Combine that with the fact that tenants usually sign lengthy lease agreements and it means that the tenant is more likely to look after the property than a short-term residential tenant.
However, it’s worth noting that any maintenance that is required will likely cost more than your typical maintenance on residential properties. Commercial properties are usually larger and more complex, so dealing with major maintenance issues, like wiring or roofing problems, could end up being expensive.
There’s a wide range of property available
When searching for commercial property for sale, you’ll see that there is a huge variety of property available across a wide range of price points in just about every location. That means you are likely to find the perfect investment property to suit your portfolio.
Challenges of Investing in Commercial Property
While there are plenty of advantages to investing in commercial property, this asset class also comes with some risks and challenges.
Longer vacancy periods
Convincing a tenant to sign up to a commercial lease can be difficult. It’s typically a major financial commitment and it can take businesses some time to settle on a property that’s just right for their operations. As a result, vacancy periods can be longer than for residential real estate, and you should factor this risk into your financial planning.
Understanding industry prospects and commercial growth in the area you invest in is essential to help minimise the risk of long vacancy periods. Also, to know more about “Should You Invest in Commercial Real Estate?” Click Here..
Higher deposit required when purchasing
Commercial properties will typically require a much larger deposit when purchasing compared with residential real estate. Unlike a residential loan, where you can borrow up to 90% of the property’s purchase price, commercial loans usually come with a deposit requirement/loan-to-value ratio (LVR) that is higher.
Value of the property is tied to business confidence
Since the value of residential real estate is tied to housing prices and suburb-by-suburb activity, properties values tend to remain fairly stable. Even when they do fall, it’s usually only a temporary dip in the market. Commercial property values, however, are tied to business confidence, which can be more volatile. When business confidence falls, the value of your property can dip significantly as well.
Is Commercial Real Estate Right for You?
A well chosen and well managed commercial property can bring high yields over the long term. However, as you’ve seen, it’s not without its risks. For first-time investors, residential real estate is probably the smart option. The yield isn’t as good, but the risk is lower and it’s less complex to purchase and secure tenants.
If you’re an experienced investor and you’re looking for a property that will generate a better cash flow, then commercial real estate might be for you.