Residential vs Commercial property
Residential property investors look for an investment property that will easily rent, has good capital growth, and will sell quickly if the investment needs to be exited.
When buying residential investment property, the property should appeal to both buyers and tenants. Compare this to commercial property. When looking at commercial property it is important to consider properties that will be in high demand from the business community both currently and into the future.
In simple terms, commercial property is all about the tenant. This is how it is different to a residential investment property. In a commercial property the type of tenant and length of lease will dramatically affect the value of the building. Using the same commercial property as an example, a building that has a 10+10 year lease to BHP will value higher than month to month lease to a small unknown company. Taking it further, the commercial property leased to BHP will value higher than the same building in a vacant state.
For this reason the length and terms of the commercial lease are extremely important. Far more so than in a residential investment property. Commercial leases are normally negotiated for 3-5 years with automatic rental increases written into the commercial lease contract. Renewal terms, and options are also offered so the landlord can get a long income stream.
The quality of the commercial tenant also affects the rental yield which is an important factor in determining the commercial value of the building. Two of the main factors that Commercial valuers look at are rental income and lease quality.
The commercial market is broad:-
- office buildings
- shopping centres
- bulky goods
- aged care
- specialised securities
Each of the different commercial types have different variables that affect their performance and they will perform differently over time.
Factors that affect retail property include variables such as on line shopping, and pedestrian count. For offices, the rate of job growth is an important factor. A commercial warehouse investor would look at factors such as stud height, storage demand and imports.
In summary, residential property and commercial property are completely different. Although location is always important in both cases, if you think commercial, think “tenant!”
As always before you look at any investment decision, get independent professional advice.