- May 17, 2012
- Posted by: admin
- Category: Enconomy, Finance News, Financial goals, House prices, Wealth
Are your investment goals and finances better suited to residential or commercial property investment? To answer this commonly asked question it’s important to first understand the differences between the two…
Length of leases
Commercial properties attract longer lease periods – typically three years or more rather than the 6-12 months of residential properties.
Most residential property maintenance is the responsibility of the landlord, whereas the costs of maintenance, rates and repairs on a commercial property are paid by the tenant.
Costs and returns
Commercial property offers the potential for higher rental yields, whereas residential property generally offers higher capital gains.
The net income tends to be higher for commercial property investment, in part because the tenant pays most of the property expenses.
Goods and services tax (GST) applies when you buy a commercial property, so allow an extra 10 percent on the property’s purchase price, which you may be eligible to claim back as a tax credit.
Both commercial and residential options have tax benefits such as negative gearing, depreciation and reduced capital gains tax rates.
Commercial property value can be hard to predict and demand tends to fluctuate with the business cycle, which is why it is usually regarded as a higher risk asset than residential property.
To manage this risk, lenders commonly charge higher interest rates on commercial loans, higher upfront and ongoing fees and lower loan to value ratios, which means borrowers have to come up with significant deposits.
Loan terms are typically shorter for commercial property and it is not uncommon for lenders to require regular review of the borrower’s business financials.
It can be harder to find tenants for commercial properties, but on the flip side commercial tenants tend to pay more attention to maintaining the property as part of their business.
Both types of properties have their pros and cons so it is advisable to research well before you make your investment decision. Please give us a call for any questions we haven’t yet answered.