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Editorial / Personal Finance & Investment

Exploring the Contrasts between Residential & Commercial Property Investment

Real estate investment serves as a strategic avenue for wealth accumulation, with investors facing a fundamental choice between residential and commercial properties. Each option carries its distinct intricacies, presenting a complex landscape of advantages and challenges. Let’s delve into the distinctions and explore the pros and cons of each.

When considering commercial property investment, several factors set it apart as a compelling option for astute investors.

Higher Potential Returns

Commercial properties often provide higher returns on investment than residential properties. It’s on average 2-3 times better on a net basis. 

Lower Operating Expenses

In many cases, commercial tenants pay for the operating expenses (such as utilities, maintenance, and repairs) that are in addition to the rent. This structure is commonly known as a “net lease” and can reduce costs for the property owner.

Professional Relationship with Tenants

In commercial real estate, relationships are often more business-oriented, which can make the negotiation process smoother and more objective than with residential tenants.

Diverse Investment Opportunities 

Commercial properties offer diverse opportunities for investors, from medical assets, retail stores, warehouses to multi-use buildings. This allows investors to explore various sectors and minimize risk through diversification.

Stability in Cash Flow

Commercial real estate investments tend to have longer lease terms than residential properties, often between 3-10 years. This can provide investors with a more stable and predictable cash flow, reducing the risk of vacancies.

Tax Benefits 

Commercial real estate in Australia offers certain tax benefits. For example, investors can claim deductions for property expenses, such as interest on loans, building maintenance, and wear and tear over time. You can also claim much more depreciation benefits vs residential.

Balanced Property Laws

In contrast to residential investment where landlords often have reduced authority and tenants are increasingly gaining rights, the commercial property sector provides a more balanced scenario. If circumstances require, there are reasonable means to evict a tenant. Unlike the case with residential tenants, where there are Tenancy Tribunals specifically designed to favour residential tenants.

Asset Value Appreciation

Over time, commercial properties can appreciate in value due to factors like improvements in the property, lower vacancy rates, longer lease terms, and upward trends in the overall real estate market. This appreciation can significantly boost the investor’s equity in the property.

On the other side of the spectrum, residential property investment carries its own set of merits and considerations.

Lower Entry Barriers

The entry barriers are less stiff with residential properties. This is thanks to lower deposit requirements (usually between 5-10%), enabling investors to step into the market with a smaller initial outlay. Commercial is 20-35%

Mitigated Risks

Risks are mitigated in the residential real estate sector. If mistakes are made within this sphere, the consequences are generally less severe than in the commercial real estate space. This is often encapsulated in the saying, “everyone needs a place to live.”

Familiar Terrain 

The learning curve for residential property investing is less steep. Unlike commercial real estate, which demands comprehensive knowledge and understanding, many people already have a basic grasp of the dos and don’ts in residential property, due to their personal experience of living in homes and apartments.

The decision between residential and commercial property investment necessitates a nuanced evaluation of an individuals goals, risk tolerance, and financial capacity. While commercial properties offer higher potential returns and diverse opportunities, residential investments come with lower entry barriers and a more familiar operating landscape.

Investors should weigh the positives and negatives of each option, aligning their decisions with their unique investment objectives and the intricacies of their financial portfolio.

About Author

Scott O’Neill is Australia’s number one commercial property expert and the Founder and Managing Director of Rethink Investing, which is recognised as Australia’s largest and most experienced buyer's agency catering to commercial property investors. Rethink Investing has sourced commercial properties for over 3,500 clients, enabling them to procure more than $3.0 billion in real-estate since 2015.