Commercial investment potentially less risky than residential
If you’re a new investor looking to shield yourself from inevitable further interest rate increases, perhaps it’s time to look at commercial property.
After a decade of reductions, interest rates are finally on the rise. If you’re a new investor looking to shield yourself from inevitable further increases, perhaps it’s time to look at commercial investing.
There’s stronger cashflow available with growth potential and it’s not as risky as many think.
Commercial properties can be totally recession-proof as well.
Things are often a lot more predictable when dealing with commercial than with residential tenants. For example, there is the residential property market’s inconsistency in regards to net income, mostly because owners are responsible for the outgoings and often tenants don’t stay long term.
When it comes to maintenance (which is almost always covered by commercial tenants), in residential portfolios the uncertainty of having to cover extra costs can become an issue, especially when you own multiple residential properties.
If your goal is to live off rental income, uncertainty over maintenance costs can be a significant ongoing concern. This is not something commercial property investors need to deal with.
Higher quality tenants mean extra income security
Higher quality tenants are another reason commercial property can provide investors with extra security of income.
For example, commercial investors are often dealing with reputable and often renowned tenants or brands. These include fast food global companies, childcare centres, medical tenants, franchise businesses, etc.
The issue many residential investors encounter is the uncertainty that comes with dealing with individuals and not established corporations. It’s a comparison between residential tenants who generally sign six to 12-month leases (with the hope of them staying longer), and commercial property tenants who sign on for three to 15 years.
Scheduled rental increases are a key contributor when building equity from commercial property. Because each year, there are rental increases built into the contract. These increases are often fixed (e.g. 3 per cent per annum) or variable (e.g. CPI increases). This will give the commercial property owner a lot of confidence, since predictable rental growth is guaranteed each year.
Rental income is closely tied to the value of a commercial property. Capital growth/equity is created by adding in the annual rental increases or even extra income through value-add strategies.
If you were to triple the rental income, you’d potentially triple the value. If you understand how to find properties that have a rental upside, you can create equity quickly by increasing the income. Commercial is very numerical based and involves less than residential investing.
Before you decide one way or another, consider why so many experienced investors only choose commercial property when investing in Australian real estate. By following a few basic principles, investors can maximise results and generate far greater cash flow than in the residential property or share markets.