With the residential property market continuing to reflect strong prices (and tightening yields, accordingly), more buyers are looking to the commercial market both for reduced competition and higher returns.
As tempting as it might be though to make the switch into the commercial market for your next investment, there are substantial differences to the property profile that bear consideration before making the jump.
To start off, the lending environment for residential for commercial can be starkly different. Commercial property tends to be more specialised than the broad appeal of a house or unit, so banks look at it as offering a higher level of risk, which needs to require a different approach – generally starting with a substantially higher deposit. 10 or 20% down might be fine on a home, but for commercial expect 30% (or more) off the bat with most lenders – potentially a big difference when it comes to borrowing power, depending on your level of savings.
Past that, you also have different interest rates applicable, again depending on the risk profile. For most buyers, a rate with a “5” in front is virtually impossible, though you might see a “6” somewhere if you are lucky enough (factor 7 or 8 as more likely), and it can jump from there depending on your type of loan. There are different requirements on commercial lending versus residential so some banks might be more likely to say “yes” with less information or equity upfront, but expect to absolutely pay a premium for the privilege.
Longer leases and tenants covering outgoings (as negotiated) ranging from rates and insurance to general building maintenance are all appealing, though vacancies (depending on the location and profile) could be anywhere from weeks to months or even years when those leases do finish. Council rates in particular come at a premium, with anywhere from 2-4x the cost of a normal residential property on a comparable block in some cases.
One of the biggest differences in commercial property though, isn’t the kind of difference you see on paper – its for lack of a better word – the “feel”. Commercial property is almost always a by the numbers affair, and will generally be sold on a return or potential return basis. Housing on the other hand has that little bit of magic that can see people willing to pay a premium (sometimes a substantial one) for that property where they just fall in love.