Residential vs Commercial real estate

[2BAD4U]

I have only ever invested in residential property but would like to hear from people who have/are invested in commercial property.

What are the pros and cons?
How does it compare to residential?
What type of property should you look for?

[Passive]

I have only ever invested in residential property but would like to hear from people who have/are invested in commercial property.

What are the pros and cons?
How does it compare to residential?
What type of property should you look for?

Like you am in Perth.
Have limited exposure but tend to favour the more established areas near a Post Office, shopping strips, altho not many in Perth. Concerned about the quantity of stuff becoming available in the new areas. Both expensive and heading for over supply. My gripe with commercial is the financing on this and even how equity is treated. I had to use equity on resi and the equity I have on the commercial offers little advantage in getting LOCs etc and rates on finance dearer and required to be paid 10 years in my experience.

Upside tenant pays rates, water rates, even my land tax and locked in . Different but easy to set the income stream and get a good income on a lower investment if in the right place. Avoid an area where your tenant will be fish and chips, x shop -etc.

[kincella]

over in the east we do not touch strip shops...the mum and dad battler shops..go for the best street...eg; chapel st Melb....missed one at 500,000 now worth 800,000...even if the rents did not change,,,,but they did
the rent is the determining factor in my opinion....

do a load of research on the web...stacks there for you

banks will lend 70-80% depends on their risk factor...cba do not do commercial for the average investor...I did it with suncorp..when they first started with commercial...5 years interest only then 15 years P & I...was not much above home loans...but it is deductible... I intend to refinance with either ING or BOQ who both have low rates about 6% for commercial

study capital rates....its usually lower than the bank rates...allows for capital growth on the commercial prop...
as interest rates go down so does the cap rate.....its magic...
so say 15000 rent at 3% = mv 500,000 at 2% its 750,000....when rates go up so does the cap rate....which has been the case up until 3 months ago...
so the 15000 /10% = 150,000....with commercial props you buy when rates are high = lower mv.....and sell (if you must) when rates go down = higher mv

in my case I strated off the small shop and holding the large shop....the large shop is for my lifetime....will sell the small and it will more than cover the loan which represents about 10% debt at todays mv...and a lovely capital gain...
I do not like industrial....but know of some bargains...might go there later..nor do I like offices...tooo volatile.... I do like rural, if you know whats coming for future development...I prefer retail in the best street in town.
cheers

[Passive]

over in the east we do not touch strip shops...the mum and dad battler shops..go for the best street...eg; chapel st Melb....missed one at 500,000 now worth 800,000...even if the rents did not change,,,,but they did
the rent is the determining factor in my opinion....

do a load of research on the web...stacks there for you

banks will lend 70-80% depends on their risk factor...cba do not do commercial for the average investor...I did it with suncorp..when they first started with commercial...5 years interest only then 15 years P & I...was not much above home loans...but it is deductible... I intend to refinance with either ING or BOQ who both have low rates about 6% for commercial

study capital rates....its usually lower than the bank rates...allows for capital growth on the commercial prop...
as interest rates go down so does the cap rate.....its magic...
so say 15000 rent at 3% = mv 500,000 at 2% its 750,000....when rates go up so does the cap rate....which has been the case up until 3 months ago...
so the 15000 /10% = 150,000....with commercial props you buy when rates are high = lower mv.....and sell (if you must) when rates go down = higher mv

in my case I strated off the small shop and holding the large shop....the large shop is for my lifetime....will sell the small and it will more than cover the loan which represents about 10% debt at todays mv...and a lovely capital gain...
I do not like industrial....but know of some bargains...might go there later..nor do I like offices...tooo volatile.... I do like rural, if you know whats coming for future development...I prefer retail in the best street in town.
cheers

Thanks for the advice mate. Have been dealing with the nab and not satisfactory. Please explain the mv/cap rate a bit more or refer me to something to get a handle on this. Called educating Archie.

That aside Perth tends to be a little newer than Melb and dynamics differ but will take on board what you suggest and not settle for secondary but go for prime when market allows.

Cheers

[kincella]

Hi there,
first link re cap rates

http://www.cre-investors.com/cap_rate.htm

two books you may like to refer to are- Craig Hall .. great detail re Cap Rates and has 7 trends...covers resi and commercial....both cover the US markets...which are slightly different to our markets

1. Timing the real estate market by Craig Hall..publisher McGraw-Hill
2. Commercial Real Estate Investing by Jack Cummins..publisher John Wiley & Sons

you might like the link to the Property Council of Australia...a very proactive organisation involved with both resi and commercial.....I have attended their Xmas function as a guest for the past 15 years.....via a client...all the big players in property are active contributors and it is a powerful force

http://www.propertyoz.com.au/Article/NewsDetail.aspx?p=56&mid=1222
other links with info applicable
http://www.upmarket.net.au/news/api/api_20071203.html
and this ..the nuts and bolts of commercial property loans...and see the low rates and low doc loans
http://www.metfund.com.au/apimag.html

that should be enough to get you started and since it is christmas day
will post more ideas later
cheers

[Passive]

Thanks Kincella

Have been strong in resi but this is relatively new to me so the info is great.

Thanks a ton. Thats what makes sites like these useful unlike the mindless ideological stuff elsewhere. Gathering around you like flies at the moment aren't they? Their agenda is pretty transparent!

[kincella]

Hello Passive...
I am enjoying both these new forums...better quality posters and like minded people.
And I really like the private message sytem.
I just posted a rather lengthy post on the other ASF site about how I came to be where I am in property.
I recall never looking for the bottom of the market, just about my timing in entering the market....which is so different to the 'woulda bees"
And today recall a theme....its not timing in the market...its all about time in the market....which is appropriate to property....whereas timing the market seem more appropriate for stocks...ie get in at the bottom and out at the top.

Regarding commercial property.....I recall you were looking for a block of resi flats....if that is the market that you know best, stay with it...but treat it as a commercial enterprise....look for commercial type returns, which includes renovating and refurbishing on a timely basis. And because the average resi investor can follow the sheep mentality, just look for the longer term rental returns to overcome the hiccups we are now seeing in estimated captial growth.
The book..timing the real estate market...emphasis is on knowing your local demographics and changes...
My thoughts today about chapel st....there is a lot of young designers in there....wonder how many will survive a downturn in the retail market.....or will the boys and girls continue to spend..chapel st is all about Geny Y .....
When I talk commecial props...my main and only interest is in cafes or restaurants...figure people love to eat no matter what.....and you can have a small shop that is attractive to national tenants...ie; Subway and KFC...
in Melb in the city...most of our lanes are filled with little tiny eateries...they are the size of an old horse stable.....they were originally horse stable and horse trails......
The first shop I looked at was a very famous restaurant in the main street..on the market for 440.000, did some research and found out the elderly owner was retiring....and also looking for a new restauranteur to take on a new lease....his son was living upstairs and not interested...I was not prepared to buy unless there was a new lease....ie no cash flow to support the loan....so I lost interest...the business closed down..(vulchers were waiting for this to happen) it remained vacant for a year and then sold for 330,000 (wow I missed that one) eventually new tenant came in...all beautiful new furniture and fitting handed to them for a song) It was unfortunate for the original owner...lovely italian restaurant and very popular....the new one is quite different but has a new clientele

I am happy with the choice I made....family and I believed for years a location would grow into an entertainment precinct...and it has...only 2 cafes when we bought...about 10 or more there now...
cheers

[kincella]

Hello Passive...
I am enjoying both these new forums...better quality posters and like minded people.
And I really like the private message sytem.
I just posted a rather lengthy post on the other ASF site about how I came to be where I am in property.
I recall never looking for the bottom of the market, just about my timing in entering the market....which is so different to the 'woulda bees"
And today recall a theme....its not timing in the market...its all about time in the market....which is appropriate to property....whereas timing the market seem more appropriate for stocks...ie get in at the bottom and out at the top.

Regarding commercial property.....I recall you were looking for a block of resi flats....if that is the market that you know best, stay with it...but treat it as a commercial enterprise....look for commercial type returns, which includes renovating and refurbishing on a timely basis. And because the average resi investor can follow the sheep mentality, just look for the longer term rental returns to overcome the hiccups we are now seeing in estimated captial growth.
The book..timing the real estate market...emphasis is on knowing your local demographics and changes...
My thoughts today about chapel st....there is a lot of young designers in there....wonder how many will survive a downturn in the retail market.....or will the boys and girls continue to spend..chapel st is all about Geny Y .....
When I talk commecial props...my main and only interest is in cafes or restaurants...figure people love to eat no matter what.....and you can have a small shop that is attractive to national tenants...ie; Subway and KFC...
in Melb in the city...most of our lanes are filled with little tiny eateries...they are the size of an old horse stable.....they were originally horse stable and horse trails......
The first shop I looked at was a very famous restaurant in the main street..on the market for 440.000, did some research and found out the elderly owner was retiring....and also looking for a new restauranteur to take on a new lease....his son was living upstairs and not interested...I was not prepared to buy unless there was a new lease....ie no cash flow to support the loan....so I lost interest...the business closed down..(vulchers were waiting for this to happen) it remained vacant for a year and then sold for 330,000 (wow I missed that one) eventually new tenant came in...all beautiful new furniture and fitting handed to them for a song) It was unfortunate for the original owner...lovely italian restaurant and very popular....the new one is quite different but has a new clientele

I am happy with the choice I made....family and I believed for years a location would grow into an entertainment precinct...and it has...only 2 cafes when we bought...about 10 or more there now...
cheers

[haydencook17]

Commercial and residential are profitable if you know the real estate cycle and how it works. The property cycle is the key to greater investment in property, real influence. If you do not understand how the cycle works, your investment will be more difficult. By understanding the cycle and find your market, then the investment is made easier because you go to the trend rather than against it.

[realestatdirector]

You need a smaller deposit, which can be important in particular if this is your first investment property. Depending on your credit history and income, you can even borrow 100% of the purchase price. Commercial mortgages require a deposit of at least 30%. Rates on residential mortgages also tend to be lower. Lenders are much stricter on borrowing criteria for commercial properties and if the property is not let at the time you purchase it, you may have to pay GST.

The commercial property market can be less predictable than the residential market (where historically properties tend to double in value every 7 to 10 years). There are also different kinds of commercial property to consider such as commercial, industrial and retail. With proper research, you may find that you are more comfortable making the decision about which type of property to invest in.

Although residential leases are shorter than commercial ones, residential properties are generally easier to let, meaning you will have less time when the property is vacant. It can take months to find a new commercial tenant.

[AMSNZ]

In my mind it is residential property for capital growth and rental (lease) return for commercial property. So for me going on this simplistic approach Ii like investing in residential property because capital growth in the long term will always outstrip rental yields.

[francinemelbour]

I would refer to invest in commercial real estate than residential because,
First reason commercial real estate has a higher rate of return.

Second commercial property is space for businesses to sell their product and services.

Third the monthly rent on a commercial property is based on a certain percentage of the profit the company makes each month.:)

[Philip Thomas]

Commercial or Residential Property Investments

Both residential & commercial property can be an outstanding investment for you. It all depends on your specific property. If you do your homework you will find high performing residential properties & high performing commercial properties.

A mix of residential & commercial is optimal to maximize your returns and spread your risk.

I would recommend you look for properties that you can add value to. This way you can increase rental yields & capital values.

With group commercial & group dwelling residential property you need to be very clear about the strata levies & ongoing costs. High maintenance costs, lifts & other mechanical items can take the shine off your returns.

For both properties I would also recommend you look at growth areas. An influx of people creates demand for housing & services. You need to also look at employment & household income trends. Number of industries & diversity is also important for long-term employment sustainability & growth.

[CSQTownPlanner]

Investing in commercial real estate is a great way to add additional properties to your investment portfolio. But it’s important to keep your options open and consider every investment that comes your way.

[BestHomeLoans]

for the one who purchase residential property is still their choice but if we look the other side and we need to upgrade it to more commercial ones,we need to buy a property that are near to more public places like the market,shopping malls or near at the school.so it is like a double purpose property.so for both property its all the same as long as you know how to use it.

[CSQTownPlanner]

In residential real estate properties people live which includes single-family homes, condominiums, town homes etc. whereas, in commercial real estate where people work which includes things such as office buildings, retail space, and other properties along those lines. Therefore, as you can see, you live in residential real estate and work in commercial real estate.