Property Diversification – commercial vs residential

Do you understand the concept of diversification but just can’t bring yourself to venture into shares, storage areas or agri business. You have always known property, your parents have always known property and property is what you do.

Will you consider commercial property? Commercial property is becoming an even more competitive investment in the recent years. If you also are renting your business premises, whether it is a shop, offices, warehouse or factory, consider the advantages of owning your own commercial premises if the costs are not prohibitive.

Positives of Commercial Properties:

Money is easier to get for purchasing commercial properties:

  • Many lenders are happy to lend for commercial properties with interest rates slightly higher than home loans but not prohibitive.
  • Many lenders are now able to lend up to a maximum of 75% of the value of the commercial premises.
  • Terms have increased from 5 years in the past to 20 or even 25 year terms.

Diversified investment option:

  • The commercial market operates independently of the residential property market.

High income returns:

  • If you are renting commercial property, you know the rentals keep going up

Less tenancy issues:

  • Unlike residential property, the tenants have the responsibility of the upkeep and maintenance of your property
  • If you have a good tenant, they may even do routine maintenance and upgrading to ensure their business is reflected in a professional manner
  • The management of the property is therefore significantly less than a residential property

Pitfalls of Commercial Properties:

  • Usually more difficult to find tenants for vacant commercial properties
  • If the property is specialised, even greater difficulty in finding tenants.
  • The lease dictates the value of the property � therefore, if there is a long term, secure lease in place, the more valuable the property.
  • Commercial properties are not only subject to the commercial property market, they are also exposed to the risks of the tenants industry.

Ways of financing Commercial Property:

  • You are able to use equity in your home to partially or totally finance the purchase
  • Able to use a great part of the commercial property to secure the loan. Lenders often will use a rate for risk method to dictate the interest rates and fees for a commercial loan unlike a residential loan or business line of credit.
  • Able to use a combination of residential and commercial finance to make it happen often with little or no out of pocket expenses from you.

Again, I reiterate that if you are currently renting your business premises, look into how much it would cost to purchase premises you could work from. Many people have been pleasantly surprised how cheap the purchase of commercial property is compared to the rental return they currently command.  Like homes, commercial properties can start from the low $100,000 and the top end is unlimited.

Therefore, spend a few days researching this newly competitive and diversified investment option to see how it may suit your situation.

Harry Pontikis is the Director of Chocolate Property – a licensed real estate agency.

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