Australia vs New Zealand, EV vs ICE, Coles vs Woolies, Rugby vs AFL, Butter vs Margarine
Lots of topics in life seem to be polarizing.
It becomes a choice of which team you are on, even when you don’t want to be on a team at all!
In the property space it can often come down to Residential vs Commercial.
Are you on team Resi or team Commercial?
Besides being quasi divisive, what is the real difference? There are many to be honest. And no, one size does not fit all. However, like most things in life, the advantages of one can be the disadvantages of another. Residential property has lots of costs that are covered by the owner, commercial property has the ability to pass these costs on to the tenant.
For example, try getting your residential tenant to pay the rates!
In today’s undersupplied markets, residential property seems like a sure thing, and most times it is. Remember, there is much emotion based around residential property for good and bad.
With Commercial, things tend to be more numbers and logical based.
Here is a live example. This week one of our units at our Hillcrest development, had an offer to lease for a rental yield of 6%.
Let’s take a look at these figures and compare with residential property.
Sale price – $520,400
Rent offer – $31,224 p/a plus GST
Outgoings – 100% Tenant pays
Term – 5 years
Increases – greater of CPI or 3.5%
Net Yield – 6%
| Commercial | Residential | Difference | |
| Sale Price | $520,400 | $500,000 | $20,400 |
| Rent | $31,224 plus GST | $24,960 | $6,264 extra |
| Term | 5 years | 12 months | 4 years of security |
| Rent Increases | Greater of CPI or 3.5% | Nil / undefined | $5,860 locked in over 5 years |
| Outgoings | 100% Tenant | Almost 100% Owner | $6,800 saving |
| Management | Tenant pays | Owner pays 8.5% | $2,121 saving |
| Net Yield | 6% | 1.955% | $15,185 year 1 |
To summarize – Over a 5 year period your cashflow position is $81,785 stronger with the commercial purchase.
(Assumptions: 8.5% residential rental management fees inc GST, all outgoings are paid by tenant in commercial property, all management fees paid by tenant in commercial property. An example house on the Sunshine Coast sold for $500,000 with a rental of $480 per week. No actual repairs or refurbishment of the house is included in the above table, although the owner will be responsible for those costs. Rates $2,000, water $1,200 Insurance $1,600 and general maintenance $2,000 are included in the cost of owning the residential property. The commercial net yield is year one only, not year 5 which would be 6.24%)
From this example, financially, commercial property is a clear winner. However, I don’t believe that residential property is dead, not at all.
On the contrary I believe in both forms making up your portfolio.
You can borrow more to purchase a residential property, it achieves more emotional upswings, (as it’s not totally numbers based) and it is more familiar to most people. The purpose of this example is to highlight the clear cashflow advantages of commercial property vs residential property, not to say that commercial property is the only one to ever buy.
It does highlight the need to build your portfolio with clear thought and considered actions.
Perhaps your existing investments are heavy in the residential space, then maybe it is time to look at commercial property options to help bolster your portfolio’s cashflow.
Who doesn’t want more cashflow right?
If you want to know more about commercial property with a high yield or cash return, then connect with us here and we will contact you directly for a confidential discussion.
P.S. to answer my question at the top:
Australia, ICE, Coles, Rugby and Butter! – LOL
Have a great day
Scotty North.
Since 2004, Scotty North has been helping people buy the best properties for their needs at prices that simply speak for themselves.
Scotty has been instrumental in bridging the gap between financial planning and traditional real estate transactions through his property advice model.
Scotty North is a Qualified Property Investment Advisor (QPIA), with accreditation’s in financial planning, mortgage broking and real estate.
By carefully considering his clients’ goals and planning for market changes via demographics and trends, Scotty designs a future proof outcome not only specific to the client’s needs but dynamic in its execution with performance indicators and exit strategies built in.