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  • Writer's pictureReal Finance

Commercial vs. residential investment properties, explained

Updated: May 19, 2022

A guide to informed decision making when buying an investment property for commercial versus residential purposes.

There are two ways to go about buying an investment property. That is buying commercial or residential. While each have greater benefits than the other, here at REIF, we only work with new residential properties.

In saying that, our Finance Specialists can assist you with financing a commercial investment property loan.

If you’re interested in learning more about residential and commercial real estate and how each type of investment property compares with the other, we recommend that you keep reading.

Commercial and residential real estate

Commercial rental properties are used for business purposes. They can vary in size. According to a Forbes article, commercial real estate is a term “that encompasses important parts of the market such as retail, office, and industrial properties.”

A residential investment property is typically a house, apartment, or dwelling that’s rented to a tenant solely for living purposes.

Differences between commercial and residential rental properties

There are various benefits and downfalls of buying an investment property of a commercial or residential nature, we’ll be exploring the top five.

The benefits and downfalls of buying an investment property for commercial and residential purposes, vary. Below, we’ll be looking at the top five and how they differ.

Rental yield

Investors of commercial rental properties can expect higher rental yields than those who own residential investments. A rental yield is the rate of investment return that can be generated from a property. For commercial real estate, the average rental yield is between five and 12 per cent. The average rental yield of a residential investment property is three to four per cent.

The reason why a rental yield is generally higher for commercial real estate is because of economic factors. Higher consumer spending and business investment can contribute to higher demand and rent for commercial investors.

Exposure to risk

Your exposure to financial risk significantly reduces when investing in residential real estate. That’s why it’s our investment opportunity of choice. With residential real estate, especially in Australia, people will always need a place to live. This has been seen, especially, in the recent rental market crisis.

When you invest in commercial real estate you become more susceptible to market fluctuations. If you’re trying to decide on whether to invest in residential or commercial properties, we recommend that you consult a financial advisor. They can give you more direction on how potential risks could impact you.

Investor knowledge

Following the prior discussion points, commercial investors require greater knowledge. As explained, commercial investment properties are more susceptible to economic shocks. Therefore, investors should have a greater understanding of the broader economy (including stocks and shares).

Commercial investment properties are more susceptible to economic shocks
Commercial investment properties are more susceptible to economic shocks

When you have greater knowledge, you’re able to make more informed decisions that can help you understand the impacts, should the economy collapse.

Investment property loan

Acquiring an investment property loan for commercial investments is more difficult than residential property. Banks deem commercial investment a higher risk. This means that the minimum deposit required is higher than that of a residential investment.

Additionally commercial real estate is often more expensive than residential. Therefore, unless you have significant capital behind you, it becomes difficult to acquire an investment property loan as an individual.

Capital growth

Capital growth is determined solely on supply and demand. We won’t go too much into this principle here but if you’d like to learn more about it, feel free to read this prior article we wrote.

When buying an investment property as a commercial investment, you’ll generally see a lower rate of capital growth. This is more so due to economic factors which can impact the supply and demand.

Make your mark in the residential investment market

If you’re interested in learning more about the residential opportunities that we have access to, be sure to reach out. With more than 100 years of combined industry knowledge across the finance and property space, our expert team of wealth creation specialists will be sure to assist your needs.

To learn more, please refer to the details below. Additionally, be sure to download our free investment eBook ‘Building Wealth Through Property.’

Ph: 1300 130 932

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