Investing in Commercial vs Residential properties

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Investing in real estate can be an excellent way to generate passive income and build long-term wealth. When it comes to investment properties, there are two main categories – commercial and residential.

While both types of properties offer the potential for returns, there are some significant differences between them. Understanding these differences is vital to ensuring that you are able to make an informed decision and find the perfect investment property to suit you and your situation.

Rental Income

The most significant difference between commercial and residential properties is the rental income they generate. Commercial properties tend to have higher rental yields than residential properties because commercial tenants usually sign longer leases and are responsible for more of the property’s expenses. This includes things like maintenance and repairs.

Residential properties, on the other hand, typically have shorter leases and lower rental yields, however they also tend to have lower vacancy rates, and can have a drastically shorter vacancy period between tenants.

Tenant Type

Another key difference between commercial and residential properties is the type of tenant they attract.

Commercial properties are leased to businesses, which means that the tenants are usually more stable and will have a longer lease, however new tenants can be much harder to find and retain once the previous tenants leave. Business may even stay in one location for decades if it suits them well enough.

Residential properties are leased to every-day people, meaning it is far easier to find a tenant when the property is vacant or the previous is moving out, however residential leases are usually shorter and tend to have a much higher turnover rate.

Financing

Financing a commercial property can be a little more challenging than financing a residential property. Commercial properties are typically more expensive to purchase, and lenders may require larger deposits and may also have stricter requirements.

Residential properties are usually easier to finance, with lower deposit requirements and more lenient requirements from lenders.

Appreciation

Both commercial and residential properties have the potential to increase in value over time, but the rate of appreciation can vary.

Commercial properties tend to appreciate at a slower rate than residential properties, but they will usually be more stable when the market is down.

Residential properties, on the other hand, tend to appreciate more quickly, however they aren’t as stable as commercial properties and can lower in value easily if the market turns.

Risk

Investing will inherently come with at least some degree of risk, but the level of risk will vary between commercial and residential properties.

Commercial properties tend to be more susceptible to economic downturns since businesses may struggle to pay rent and could even go out of business, while residential properties may be more vulnerable to natural disasters or unforeseen events, such as job losses or pandemics.

The decision on whether it’s best for you to invest in commercial or residential properties depends on your current situation, including your goals, finances, and the level of risk you are comfortable with.

While a commercial property may be perfect for one individual, it may not be suitable for another, and the same goes for residential properties.

If you want to get the best advice on which type of investment property is most suitable for you, be sure to speak with one of our expert Mortgage Advisors at Glass Financial!

Our specialist brokers will help you access the most effective loan to suit your situation, and we will always be there to help you refinance to a more effective structure when things change down the road.

Speak with a Glass advisor today on 1300 245 277 or send us an email on [email protected]

 

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