There are many options out there for investors: shares, stocks and bonds, residential property, self-managed super funds and more. Each can sound very appealing in its own right but it takes a shrewd investor to make sense of it all and realise optimal returns.
So how does investing in commercial real estate stack up against other options? Let’s examine some of the particulars.
When it comes to investing in the share market you are taking a risk of investing in a business. Unless it does well, you aren’t likely to see a return on your investment for some time – if at all. Market forces, of course, play a role. It can be a very enjoyable ride when your shares are doing well, but when the market takes a downturn like they did in the GFC, shareholders can lose out badly.
Bonds, on the other hand, are considered less risky, but they form part of a debt that the issuing entity offers to pay back “some time” in the future. This lacks continuity and removes any immediate cash flow.
Super funds are different again; if you choose to manage your own fund, it comes with a great deal of responsibility and involves substantial effort and time on your part. You are also required to have substantial knowledge of financial and legal matters – a trap for inexperienced players.
Residential real state
Residential real state, although still a popular choice among many people, produces comparatively low yields, can have a high turnover of tenants, and the leases are usually no more than 12 months. Plus, as a landlord, you are up for most of the outgoings against the property, which means cash flow can become an issue.
Commercial property investing
Compared to the options mentioned above, commercial property investing can yield high returns, without the degree of micro-management required by residential investment.
One of the biggest attractions for commercial property investing is that it offers rental yields anywhere from 5% to 8% and even more in some cases. This is a great deal better than its residential counterpart, which sits around 3%-4%, thus creating the grounds for a stable and positive cash-flow position.
As we mentioned earlier, residential leases are rarely longer than 12 months. A typical commercial property lease can stretch from 3-5 years, to as many as 10 or 15 years. Fixed annual rent increases also sit slightly higher than inflation.
Another important factor to consider is that tenants pay the outgoings; this includes items such as rates, insurance and land tax as well as maintenance and repairs. The quality of tenant you attract in commercial property is more likely to look after your asset given it is their business from which they are operating. There are also tax benefits through a broader scope in depreciation.
Finally, one should consider the vast array of properties on offer such as petrol stations, to small, medium or large offices, city car parks, and shop fronts, to health centres. Indeed the investor has many options and incentives from which to weigh up the benefits.
Need advice? Talk to the experts at HKC Property Consultants. We’re happy to prepare a strategy for your next lease or help you find new premises to invest in. Call now 03 9078 4794.