Residential vs. Commercial

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Below are some of the advantages of Residential and commercial properties.

Advantages of residential property

• Ongoing property shortage – residential property is currently under supplied and this is a key reason why residential will continue to enjoy capital growth in the medium term.
• Larger choice of investments with more residential properties available for purchase.
• High access to credit and leverage – banks will lend at a higher Loan to Valuation Ratio (LVR) and at lower interest rates with residential property. Many lenders are lending 95 per cent again.
• Large amount of historical performance data – residential property prices have been monitored for over a hundred years, providing greater investment certainty
• Large amount of ongoing analysis – there are many data sources that can track and make forecasts on your residential investment, such as Australian Property Monitors or RP Data.
• Increasing rents/yields – strong demand for property and rising population ensures rising yields.
• Low vacancy rates – provides higher confidence of receiving the forecasted rent/yield.
• Good capital gains – residential property has enjoyed stronger historical capital gains.
• Self-managed super funds – you can now buy a residential property with leverage in a SMSF.
• Offshore demand – there is an increasing demand from Asian investors for Australian property.
• Rising investor demand – the current high demand is contributing to capital growth.
• It’s a lot simpler – landlords can rely on a property manager to find someone who wants to live in the dwelling. The demand from tenants is strong so if one tenant is unable to pay their rent, a new tenant can be sourced quickly with minimal involvement from the landlord.

Disadvantages of residential property

• Lower yield – lower annual returns with average yields approximately three to five percent. 
• Rising interest rates – deterioration of the return on investment and possibly even losses.
• Mortgage overhang – as interest rates rise, mortgage defaults may result in an increase to supply which will affect the value of surrounding properties.

Advantages of commercial property

• Higher yields – higher annual returns than residential property with average yields ranging from five to 10 per cent depending on the type of tenant and the terms of the tenancy.
• Business owner benefits – Business owners can take advantage of buying the premises they need to occupy. Some great tax advantages can be found doing this.
• High access to credit and leverage – banks are comfortable to lend but at a reduced level compared to residential – usually 80 per cent compared to 95 per cent LVR with residential.

Disadvantages of commercial property

• High level of expertise required – you must understand credit assessment to analyse the likelihood of a tenant being able to pay the rent. This includes reading tax returns and business plans.
• Value of property depends on tenant – the credit assessment is directly linked to the valuation of the property, so you must get this right or risk losses.
• A large number of start-up businesses fail. Additionally, a business may have done well in one location but that doesn’t mean it will do well in another.
• Smaller choice of investments with fewer desirable commercial properties available to buy.
• Low capital gains – on average, commercial property has not enjoyed the same historical capital gains as residential.
• Higher vacancy rates than residential property.

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