There are many reasons why an investment in commercial property could prove to be a wise decision. Commercial properties can be a very strong investment choice, particularly for investors whose investment goals have a focus on cash flow over other investment objectives and outcomes.
Within the residential property market, a strong rental yield per annum is judged at approximately 4% for a house and 5% for a unit or townhouse. These numbers allow for investors to cover their upfront investment and regular cashflow commitments whilst sitting within the residential market and potentially counting on an appreciated asset sale price along the line to provide the real upside to their initial investment.
However, the commercial property world can bring in much higher rental returns on a per annum basis. Retail properties commonly bring in up to 7% per annum, and office properties are even higher at a median 8% per annum yield. For those looking for the highest yield per annum, industrial property can bring a rental return of up to and over 10% pa.
Another strong benefit that comes with investing into commercial property as opposed to residential property is the level of responsibility, both financially and practically, that is carried by the tenants themselves. In a residential rental situation, the investor/landlord is responsible for many ongoing expenses – council rates, water rates, any required repairs, property insurance, management costs and yearly maintenance. This is not the case for commercial property investors. As a commercial landlord, you reap the benefits of the responsibilities borne by the tenant, including payment of council rates, insurance, and even property management fees. The difference in ongoing costs when a residential investment is compared to a commercial investment is significant: residential landlords may find up to 30% of their received rent is spent on expenses, whilst a commercial landlord can count on only needing to allocate up to 5% of received rent to the cost of ongoing expenses.
Commercial property owners also benefit from comparably longer lease periods. The average lease for a commercial property is for a minimum of 3 years and can go up to 10 years, compared to the 12 month norm for residential rentals (according to Nila Sweeney writing for realcommercial.com.au). This provides commercial landlords with an added level of security when it comes to bankable rental income that assists in creating a positive cashflow scenario.
Solid Appreciation Rates
Commercial properties bring with them an added investment benefit in their reasonably solid appreciation rates. By investing wisely into areas with strong growth potential (depending on varying economic and population growth factors), commercial property investors stand to gain both a healthy annual rental yield and capital growth prospects.
Commercial property investments require additional research and are best made in the context of a long-term investment plan. However, they hold many benefits in comparison to residential investments, and the opportunities they can bring are well worth the time required to understand what a commercial investment will require of you and the potential risks and payoffs that are a part of the package.