Commercial vs Residential Property

Choosing which one to invest in can be tricky, however, smart investors should not only consider the advantages and disadvantages of each property type but also how each investment would fit their current portfolio.

The debate over whether it is better to invest in residential or commercial property continues to divide property investors and real estate professionals. Some favour residential, since it is the least risky of the two, while others say that commercial is the safer option thanks to its cash flow potential.

Commercial Advantages

Higher returns on investment: The average rental return for residential property in Australia’s capital cities is around 3.6 per cent. For commercial property, it is not unusual to get anywhere between 8 per cent and 12 per cent.

Longer leases: Normal residential tenancy turns over every six to 12 months, whereas a standard commercial tenancy can last anywhere between three to 10 years.

No rates and other outgoings: Landlords of residential properties are liable for paying rates, such as council and water, whereas commercial tenants pay these outgoings for the owner.

Commercial Disadvantages

Property is sensitive to the economy: In a strong economy, businesses flourish and the demand for commercial property usually rises. In an economic downturn, this demand usually decreases.

It takes longer to find a tenant: It is not uncommon, unfortunately for commercial properties to have long vacancies and landlords have to cover all costs during these periods.

Property value can drop sharply: The value of commercial properties closely correlates with the lease on the property. If a commercial property becomes vacant, or the lease is about to expire, the value of the property would generally be expected to fall.

Residential Advantages

Taxation: Considerable tax advantages exist for those who own residential property, e.g. those who own a property for more than 12 months can apply the 50 per cent capital gain discount when they sell.

Capital growth: Since the bank provides most of the funds to purchase residential property, you have considerable leverage and your capital growth returns can be substantial.

Vacancy rates: The vacancy rates for finding tenants for residential property are generally much lower than commercial property rates,

meaning you will have a steadier source of income.

Residential Disadvantages

Costs: The costs associated with buying and selling are quite high for residential property. Stamp duty, mortgage registration and agent costs all need to be taken into account.

Rising interest rates: Increases to interest rates will increase your repayments and decrease your disposable income.

Locality risk: Buying in the wrong area or location is a serious risk for residential property. Wrong location can significantly affect an investor’s return over the long term.