When it comes to investing in property, most people will immediately think of residential property, however commercial property can also make a great investment option. So which is better? The answer is sure to surprise you.
The vast majority of people will turn to the residential property, rather than commercial property, when thinking about investing.
This is because residential property is much more familiar to us – we live in it all our lives, it’s often splashed across the front pages of our newspapers and it’s the subject of numerous reality TV shows, such as The Block, House Rules and Location, Location, Location.
However, commercial property should also be considered by investors as these types of assets can deliver great returns as well.
Comparing residential and commercial property, which is the better option and which is right for you?
As investment assets, residential and commercial property are fundamentally different from each other in two ways.
Typically, a good residential property will grow faster in value and is therefore suited to investors who want to substantially increase their personal wealth.
However, a good commercial property will generally provide high rental returns (i.e. high yields) and is therefore suited to investors who want strong cash flows.
Consequently, identifying which asset type is better for you will depend on your property investment goals and strategy.
Typically, for investors aged 20-55, residential property is the better option because these investors are best placed to benefit from multiple property cycles, and subsequently upswings in property prices.
Over a decade, it’s not unlikely that a good residential property could increase in value at 6% per annum, however commercial property is only likely to increase in value at half that rate.
That’s why residential property makes the better investment choice for those who want to increase their personal wealth.
For investors aged over 55, who are nearing or at retirement, commercial property is generally the better option because it provides strong cash flows that can supplement or replace one’s salary. Note that cash flow does come with a higher vacancy risk.
Net rental yields from a good commercial property are likely to be 7% per annum, however residential property is only likely to return net rental yields of 3% in capital cities and 5% in rural locations.
That’s why commercial property makes the better investment choice for those who want strong cash flows.
So, while most people gravitate towards residential property when it comes to investing, investors will most likely need to incorporate both residential and commercial assets into their portfolios over the life of their investment journey.
Damian Collins is the founder and managing director of property investment consultancy Momentum Wealth. Offering market leading research and advice on the Australian property market, the company helps clients accelerate their wealth through property investment by assisting them in the strategic planning, financing, acquisition, management and development of their commercial and residential investment properties. Damian has completed a Bachelor of Business at RMIT University and a Graduate Diploma in Property at Curtin University. Damian is the Deputy President of the Real Estate Institute of Western Australia (REIWA).