Where To Invest – Commercial VS Residential Rental Property

There are many factors to consider when deciding where to invest your money. Commercial and residential rental properties offer different benefits and drawbacks. You should investigate the pros and cons of each before you make a decision.

In this article, we will explore the different types of commercial and residential rental property in Sydney, and discuss the pros and cons of investing in each type.

We will also look at how investors may obtain funding for commercial and residential investment properties and list some of the running costs and expenses you should be aware of.

Finally, we will provide an important tip on how to choose an investment property in Sydney likely to generate a high return on investment.

Commercial property options

Commercial property options

There are a variety of different types of commercial property available for investment in Sydney. Some of these include:

Office buildings

Office buildings can be a great investment for those looking for a stable and secure return on their money. Tenants tend to have long leases and, because they work there, they take care of the property.

Retail outlets

Ranging from a shop in a single building to a multi-storey shopping centre, or a shopping strip, investing in retail should be stable. It would be best for you to buy a property with a tenant in place to avoid the trouble and difficulty of finding a tenant and agreeing on a lease.

Retail properties should be located in high-traffic areas, which means they are more likely to generate foot traffic and customers for the retail business.

If you purchase with a tenant already in place, the property will have built-in features like shelving and display cases, which can save you money on start-up costs.

One risk of investing in retail property is when the demographics of the local area change and it becomes less attractive to live and work, or the economy, generally, is suffering, you may have hard-to-fill vacancies.

Warehouses/industrial

They are often located in industrial areas, far from the expensive business and shopping areas, which means they are usually cheaper to purchase than other types of commercial property.

These types of properties often have a large amount of space, which can be used for storage or manufacturing.

You may purchase a property with equipment such as a chiller room for flowers or food or an overhead crane. Although this may put off some potential tenants you could benefit if you have the only premises equipped this way in a particular area.

Self-Storage

You may use a large warehouse-type property as a self-storage facility. One of the attractions of this type of establishment is there are no tenants!

Make sure your contract for each storage area states monthly payments must be made or the goods in storage may be removed and sold to cover your costs.

Be aware it may take some time before you are able to achieve the optimum return for your investment, with all available storage units full. You may also need employees on-site 24/7, for security and access management.

Residential properties in Sydney

Residential properties in Sydney

Many investors choose to invest in residential rental property because it tends to be less expensive than commercial property, and there is less risk involved as you are less likely to experience vacancy periods in the property. However, returns on investment from residential rental properties can be lower than those from commercial properties; You will need to consider this when making your decision.

In a city with the size, and population, of Sydney, it is no surprise there are many different types of dwellings on the market. The more popular residential investment properties are as follows.

Apartments

Owning multiple apartments in a single building is considered, by some, to be a commercial investment.

Investing in apartments can be a great way to earn a steady income from rental payments, as well as the potential for capital appreciation as the value of the property increases over time.

Apartments tend to be for city-centre living where space is at a premium. The location is key for your investment property. Tenants of a city-centre apartment probably work in the city. If you can’t afford a property close to the CBD, make sure you purchase close to a train station or a bus route, for transport around the city.

A possible downside of investing in apartments is the tenants! They tend to not stay for long and may not care for the property.

Houses, duplexes, and townhomes

Houses can be a great investment because they offer the potential for high rental income and capital appreciation. However, houses can also be expensive to maintain, and it is important to have a clear understanding of the expenses involved before you purchase a property.

The rental income tends to be higher than for apartments because you have a larger dwelling with more rooms. A benefit of owning a house as an investment is your tenants tend to be more mature, often families, who will stay for longer and take better care of their home.

Funding

Funding

Commercial and residential investment properties are typically funded through a variety of sources, including:

Banks

Commercial and residential investment properties can be financed through banks. Banks typically offer loans with fixed interest rates and terms of up to 30 years.

Private lenders

Commercial and residential investment properties can also be financed through private lenders. Private lenders typically offer loans with higher interest rates than banks but they may be more flexible on terms and conditions.

Government programs

A canny property investor should check out government programs. These programs typically offer low-interest loans with long repayment terms.
To achieve the best return on your investment property, it is essential you factorer all potential expenses and running costs into your budget.

Costs and expenses for commercial properties

Costs and expenses for commercial properties

Commercial investment properties can be a great way to earn a steady income, but there are a number of costs and expenses involved in owning one. Some of the most important expenses to consider include:

Property taxes

Commercial investment properties in Sydney can be subject to high property taxes, which can impact the profitability of the property. You should make sure to research the current property tax rates in Sydney before you purchase a commercial investment property, and to budget for these taxes in your overall expenses. Commercial property taxes are usually assessed on the value of the property, meaning they can increase if the property value increases over time.

Maintenance and repairs

Commercial investment properties require regular maintenance and repairs to keep them in good condition. This can be a significant expense; it is important to budget for it in your overall expenses. Some of the most common maintenance and repair tasks include:
Painting
One of the easiest ways to keep a commercial property looking its best is to paint it, regularly. Painting helps to protect the property against weathering and fading. Choose a high-quality paint capable of withstanding the elements, and schedule regular painting sessions to keep the property looking its best.

Roof repairs
The roof of your property should be inspected regularly for signs of damage or wear. If the roof is damaged, it needs to be repaired as soon as possible to prevent further damage to the property. Commercial roofs are typically made from materials such as metal, asphalt, or rubber, which can last for many years if they are properly maintained.

HVAC repairs
The heating, ventilation, and air conditioning (HVAC) system is responsible for keeping the property comfortable for tenants. If the HVAC system is not working properly, it can be a major expense to repair or replace, plus you will have disgruntled tenants. Commercial HVAC systems are typically more complex than residential systems. Hire a qualified technician to perform occasional inspections as well as any repairs.

Plumbing
Plumbing problems can be a major headache for commercial property owners. If there are leaks or other issues with the plumbing, it can cause extensive damage to the property and disrupt business operations, possibly even requiring the premises to be vacated until repairs are completed. You should have a qualified, trusted plumber on call to handle any plumbing repairs needed.

Insurance

Commercial investment properties may require more insurance coverage than residential properties. This is because commercial properties are often larger and can be more expensive to repair or replace. You should always have insurance coverage to protect your investment property from damage or loss.

Some of the most common types of insurance coverage for commercial properties include:

Commercial property insurance
This type of insurance provides coverage for the structure and contents of the property, as well as any business equipment located on the property. It can provide cover against damage or loss caused by fire, theft or vandalism, for example.

Commercial liability insurance
This provides coverage for any damage or injury caused by the property owner or employees. It can help protect against lawsuits brought against the property owner.

Business interruption insurance
Coverage for any lost income in the event the property is damaged and is unable to be used. It can help to offset the costs of repairing or replacing the property.

Running expenses for a residential investment property

Although far less than for a commercial property, investment homes will also have ongoing expenses. These include:

Property management fees

A property manager will charge a fee to manage your property on your behalf. Factor this into your budget.

Maintenance and repairs

Your property will need regular maintenance and repairs, which can be costly. Be sure to budget for this in advance.

Council rates and water rates

You will need to pay these charges each year. Make sure you have accounted for them.

Insurance

Have your valuable property insured against damage, as a minimum. The cost of insurance will vary depending on the value of your property and the level of coverage you choose.

Ask the experts

Having considered the various types of property, funding and establishing a basic budget you have the big decision – which property should I buy?
It’s essential you ask for professional advice from local real estate experts.

At MGM MARTIN, we know the Sydney property market. Our years of experience mean we know the best location for your investment property. We may already have the perfect investment for you on our books.

Don’t miss out, contact us today.

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