When Should You Consider Commercial Property?

If you’ve already found success in the residential game, it just might be time to broaden your horizons and consider the commercial market.

Here’s a breakdown of why you might be interested in adding some commercial property to your portfolio:

1. Desire for Higher Returns

One of the main attractions of commercial property investment is the potential for higher returns compared to residential properties.

While residential properties might offer rental yields of around 3-4%, commercial properties can deliver significantly higher yields, potentially ranging from 6% to 12%.

This higher return is due to the longer lease terms and the nature of commercial tenants, who may be more reliable and less transient than residential tenants.

2. Looking for Stable, Long-Term Leases

Commercial properties are typically leased for longer periods, often anywhere between three to ten years, compared to the six to twelve months common in residential leases.

This can provide a more predictable and stable income stream, reducing the frequency of tenant turnover and associated costs.

If you value long-term, stable cash flow, commercial property could be a good fit.

3. Smaller Deposits and Lower Initial Costs

While the price of some commercial properties can be steep, there are opportunities to enter the market with a relatively modest capital outlay.

For instance, smaller commercial investments, such as a car park or a small office space, can be more affordable than equivalent residential properties.

This lower entry point might be appealing if you're looking to diversify your portfolio without committing a significant amount of capital upfront.

4. A More Hands-Off Investment

Commercial properties often come with net leases, where the tenant is responsible for most of the property's outgoings, including council rates, insurance, and maintenance.

This can make commercial property a more hands-off investment compared to residential properties, where landlords typically bear these costs.

If you prefer a less hands-on approach to property management, commercial real estate could be more suitable.

5. Diversification of Portfolio

If your current investment portfolio is heavily weighted towards residential properties or other asset classes, branching into commercial real estate can provide diversification.

This diversification helps mitigate risk, as the commercial property market often behaves differently from the residential market.

For instance, economic conditions that negatively impact residential markets might not affect commercial properties in the same way, or vice versa.

6. Long-Term Investment Horizon

Investing in commercial property is a long-term commitment. Unlike residential property, where capital growth can often be more rapid, commercial properties often require a longer gestation period to appreciate.

This is particularly true if your investment relies heavily on the stability and profitability of the tenant's business. If you're in a position to adopt a patient, long-term perspective, commercial property can offer significant rewards.

Conclusion

Commercial property can certainly be a lucrative addition to your portfolio, especially if you're seeking higher returns, stable income, and a more hands-off management experience. However, it's essential to weigh these benefits against the risks, particularly some of the market's sensitivity to economic changes, and the potential for longer vacancy periods.

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