Commercial Vs. Residential Properties

Dilleen Property Group 2023

When it comes to property investing, Commercial and Residential properties are the most common property types investors would choose to invest in. It is important to pick the type that is most suitable for your investment goals depending on the advantages and disadvantages that they come with. If you’re looking to build a large property portfolio over a long time frame, which property type is most suitable for you?

Here are the differences between Commercial properties and Residential properties:

Finance:

Banks have different policies when it comes to financing Residential and Commercial properties. It is generally more difficult to obtain finance for Commercial properties as lenders see them as riskier investments. Due to the risk involved, some lenders choose to only lend to Residential properties.

Deposits:

Larger deposits are generally required to purchase Commercial properties. It is possible to purchase a residential property for a 5% - 20% deposit, whereas commercial properties require a 30% and higher deposit. To put this into perspective, a commercial property valued at 300K will require a deposit of 90K, whereas a Residential property valued at the same price only requires a deposit of 30K. Higher deposit means that higher upfront savings are required for Commercial properties. This will hinder your ability to buy your next property and slow down your process of building a large portfolio.

Leases and Vacancies

Commercial properties are rented out to businesses hence they have much longer lease agreements compared to Residential properties. These can range from 5 years to 10 years, whereas Residential property leases commonly range from 6 months to one year. This will affect the vacancy rates of Commercial properties, as leases are longer, tenants would want to take more time finding the most suitable property for their business. Additionally, factors such as economic status, population and demographics of the location also come into play hence causing a longer period of time for Commercial properties to rent out.

Expenses:

For Residential properties, the property owner is responsible for paying for rates and water supplies, whereas, for Commercial properties, it is the tenant’s role to pay for these expenses. This provides more money for Commercial property owners as there are fewer expenses to pay for.

Conclusion

For beginner investors, Residential properties may be a better property type to invest in as they are generally safer and more predictable compared to Commercial properties. Most investors first master Residential properties before venturing into Commerical properties, however, it is important for you to understand the advantages and disadvantages of both property types and see which type would offer you the most benefit in your current situation. If you require assistance building your property portfolio or have an inquiry, feel free to contact us here to learn more about our services and investment strategy.

Disclaimer: This is not intended as legal, financial, or investment advice and should not be construed or relied on as such. Before making any commitment of a legal or financial nature, you should seek advice from a qualified and registered legal practitioner or financial or investment adviser.