The average investor probably thinks investing in commercial property is beyond their reach and generally it does require a higher upfront investment, with most commercial properties starting around the $1 million mark. It can, however, generate a higher return (although usually at a higher risk). According to Property Professor Peter Koulizos a unit will average a return of around 5% a year, whereas you could earn up to 8% on a warehouse or industrial unit.
Risk is higher because vacancy rates can also be higher – it can take longer to find a tenant in the first place or to replace one, sometimes up to a year or more. On the upside, your lease is likely to be longer – usually around 5 years with potential that a tenant may renew for another five years or more (it's usually up to the tenant as to whether they want to renew).
Here's a quick rundown of the positives and negatives:
- Longer leases mean more stability
- Better quality tenants, particularly if they are government or large corporates
- Lower outgoings – as the tenant generally pays for things like council rates, insurance, repairs and maintenance.
The not so good:
- Higher cost of entry, although strata titles on smaller properties can be a good option. Or even a car space – they cost around $50,000.
- The economy – residential property is usually fairly resilient as people have to live somewhere, but businesses can close down suddenly if things go bad
- Maintenance – upgrading and refurbishment costs can be high
- The lease – usually pretty complicated – you need to read it carefully and should have a solicitor review it
- Stamp duty – high upfront cost
As with all investment decisions, research, research, research is the key. Check out Google Earth, domain.com.au and realestate.com.au to name a few great websites to help you when you're looking for a property. You can often get an instant snapshot of the entire surrounding area, the demographics of those within it, any local development and who else is based there.
You also need to get good financial and accounting advice. And consider your own “risk personality”. Are you prepared to take on extra risk for a potentially higher yield? Or do you prefer “sticking to your knitting”. You can take a quick quiz here and then tell us how you scored.