What Is A Commercial Property – A Complete Guide
What Is A Commercial Property – A Complete Guide
Planning to buy a property, whether commercial or residential, is one of the best ways to open up a new investment opportunity. When it comes to generating more financial rewards, investing in commercial properties is the ideal choice. However, you must understand that similar to a coin, everything has two sides and stories. Learning about the pros and cons of investing in a commercial property in Brisbane is essential before making a fair decision.
This article will quickly run you through a few aspects of commercial properties, the positives, and the downsides before making the investment decision. What is a commercial property – a complete guide.l
What Is a Commercial Property?
A commercial property may refer to buildings and land that are structured only for profit-generating activities rather than regular residential purposes. Commercial property includes retail buildings, office buildings, warehouses, industrial buildings, apartment buildings, and mixed buildings such as offices or apartments. However, you must know that several aspects come into the picture when managing such properties.
Is There any Difference Between Commercial Investment and Residential Investment?
Apart from being called a property, you can notice a few similarities (similar and not the same!) between both types of investment. From the lease length to levels of risk, everything varies in both the property investments. Additionally, how you approach both investments can vary a lot. One of the key differences between commercial investment and residential investment revolves around the lease. Commercial leases are long and play a pivotal role in determining the value of the property.
The demand for commercial properties is more elastic than residential properties. This also means that the vacancies between commercial tenants will be longer than those between residential tenants. When it comes to commercial properties the risks are greater, and the returns are higher.
Pros of Investing in Commercial Properties
1) Higher Yields
Commercial properties offer yields between 5% and 12%, which is much higher than residential ones (3-4%). This means that commercial investments are cash-flow positive.
2) Longer Leases
Unlike residential leases that are no longer than one year, commercial leases are typically three years long. Some may even go as long as 15 years!
3) Increase in Annual Rent
Generally, commercial agreements have fixed increases in annual rent which is already mentioned in the lease. Annual increases between 3-4% are common in Commercial properties.
4) Tenant Pays Outgoings
Most commercial tenants sign net leases. Net leases require tenants to pay for most of a property’s outgoings. Property outgoings include council rates, insurance tax, land tax, as well as maintenance and repairs.
Cons of Investing in Commercial Property
1) Stricter Terms of Finance
Since the level of risk is higher in commercial properties, the bank requires higher deposits and can charge higher rates as well as administrative fees.
2) Increased Exposure to Economic Cycles
The demand for goods and services is more elastic than the demand for housing. This means that commercial properties are more sensitive to changes in the economy.
3) Requires Thorough Understanding of Economics
Since commercial properties are more sensitive to economic cycles, investors require a deep understanding of how well the economy is performing. This ensures they buy a property that can attract tenants with sustainable businesses.
4) Longer Vacancies
Because of increased exposure to economic cycles and added time to necessary repairs, the vacancies between commercial tenants tend to be much longer than those of residential tenants. This means you will have to cover all the expenses without the support of any rental income.
