Should beginner investors look at commercial property?
By Ryan Trickey, Commercial Managing Director, Ray White Commercial Glen Waverley
It’s been impossible to read the news recently without seeing predictions of a housing market slowdown in Australia. For one, CoreLogic RP Data shows that over the June Quarter Sydney and Melbourne home values only increased by 0.8 and 1.5 per cent, respectively. That’s a far lower rate of growth than usual.
These developments may have residential investors thinking twice about their options, particularly less experienced operators with smaller appetites for risk. The best alternative for those worried about the residential market may be commercial property.
With the possibility of residential value gains slowing the advantages of commercial property start to look increasingly attractive.
The advantages of commercial property
Your commercial investment property is unlikely to increase in value by 10 to 20 per cent over a year like a residential property might. However, with the possibility of residential value gains slowing, the advantages of commercial property start to look increasingly attractive.
First of all, houses in Melbourne have an average yield of around 2.7 per cent, CoreLogic research shows. Commercial has been known to return well over double that, meaning it may be far easier to quickly pay down your debt and increase your equity.
Secondly, commercial properties may require less maintenance. You’ll be lucky to secure a one year lease in a residential property, but with commercial you’ll be looking at two, three and sometimes even five years. What’s more, your commercial tenant may have to cover most of your outgoing costs – such as water rates, owners corporation fees and council rates and even building insurance. That means less ongoing costs and the potential to set and forget your investment.
Developing strategies for success
You have to select the right property, a task which may require more legwork and research than a residential purchase.
Despite its considerable advantages, commercial property investment isn’t all roses. Since residential property is in such high demand, there’s little risk of vacancy, but for commercial that doesn’t hold true. It’s not uncommon for such properties to go vacant for six months or more, which can put enormous pressure on your finances.
Minimising that risk is what successful commercial property investment is all about. To succeed in doing that, you have to select the right property, a task which may require more legwork and research than a residential purchase.
Look for a property in an excellent location and position. Is it easily accessible, is there adequate car parking and is it in a developing or growing area? Next look at your property’s price point. Can you easily afford it without putting a strain on your finances? It’s helpful to have a little money saved just in case a vacancy does occur. Last of all look at the property’s cash flow. Finding a yield that’s as high as possible is key for beginner investors as it will help for them to quickly pay down debt.
Picking the right property
Picking the property that best suits your needs can be a complex process. That’s why you need to do your research – talk to owners in the area you’re looking at, seek the help of an experienced local real estate agent and gather as much information about the property as you can before purchasing.
Talk to owners in the area you’re looking at, seek the help of an experienced local real estate agent.
The right solution will be different for everyone, however, sub-400/sqm industrial warehouses are often particularly attractive for new investors. They’re usually affordable, high yielding and in high demand, provided you pick something in a desirable location that suits your tenants needs.
Generally speaking you should avoid buying a property that’s part of an owners corporation or complex that houses six or more similar assets. That’s because these larger complexes tend to create their own market outside the market and if you put your property up for lease or sale there’s a good chance you’ll be competing against at least one or two identical assets.
This may make your property harder to lease or sell, which can drive rents and sale prices down.
Taking the plunge
There has long been a viewpoint that commercial property investment is only for sophisticated and experienced investors. The fact is, new and even first time investors may be better served by a commercial property, provided they do their research.
If you’re considering it you’ll need as much knowledge as you can gather and the help of an expert who really knows the market. With the right mindset and the best advice your investment could be the first of many.