If you are an investor seeking cash flow and capital growth from your real estate, consider a commercial property.
In today’s market, a residential property investor would be delighted if they could get a “gross” rental return of 3% p.a. on a house and 4% p.a. on a strata property. However, commercial property can provide higher rental returns.
It’s not uncommon for retail property owner seeking cash flow and capital growth to earn up to 7% pa from CBD office property and 8% to 9% from industrial property. These returns are directly impacted by the type of property and its location attracting certain type of business or industry.
The other instrumental factor is “who pays for the tenancy costs” such as council rates, water rates, strata fees, maintenance (excluding capital costs), insurance, property management fees etc….
A residential landlord pays for most of them if not all, equivalent to up to 30% of the rent.
A commercial landlord? Their tenant pays for the vast majority of these expenses. As a result, the commercial property investor would incur costs equivalent to approximately 5% of the rent.
Quite a difference!
So, why would an investor buy a residential property to end up with an income equivalent to 70% of the rent and that is before the loan repayment are accounted for, when they could buy a commercial property and finish up with 95% of the rent before loan repayments?
The main reason is the vacancy factor. It might take a commercial landlord months to find a new tenant, depending on the type of property, type of industry it will suit and its location.
A residential property? The vacancy factor can vary from a weekend to a month depending on the type of property, attributes and location.
Secondly, a typical investor and the emphasis is on the word “typical”, feels familiar if not comfortable with a residential property. “I can move in one day”, “I can rent it to a friend or family member”, “My children can live in it” etc… tend to be running in the back of their minds when determining what type of property they should invest in.
The comfort zone – more or less.
When you are seeking cash flow and capital growth, investing in real estate is plainly a financial decision with an objective and the rational of “how much can I earn from it”.
So, if it is cash flow and capital growth you’re seeking, commercial property can be the right asset for you, based on these principles:
- One makes money when one buys not when one sells.
- Price budget.
- Returns budget.
- Cash flow budget.