TO INVEST IN COMMERCIAL OR RESIDENTIAL PROPERTY?
Commercial property covers a variety of categories and can be further divided into for groups- commercial , industrial, retail and hospitality. Because they cost so much, commercial properties are often owned by large financial institutions.
In contrast to commercial property, residential investment property is for all investors. Most people have a basis understanding of housing needs and the value of residentail real estate, whereas not everyone is able to guage the business potential or the value of commercial property.
The following table gives an overview of the differences:
|Entry costs are higher- $200,000- $500,000 +||Entry costs are lower $100,000- $200,000 +|
|Financial institutions usually wont lend more than 60-65% so you need equity. Financial institutions generally take a more conservative approach to lending because of the higher risk.||Financial institutions usually will give a maximum loan of 90-95%|
|Higher returns, but more risk||Lower returns, but less risk|
|Strongly effected by economic conditions. Can be a largely uncontrollable vacancy factor. Is subject to the ravages of over and under supply. Downturns in the economy have caused many shops and office space to be vacant.||Usually always a demand for rental homes in most areas.|
|Thus is suitable for only a small percentage of investors- a great deal more experience and expertise is needed to monitor all risks, particularly those relating to the vacancy rate.|
|Leases are usually long term.||Tenants may change frequently|
|Almost 80% of small businesses do not survive their early years of operation, so it is very important to have the right business tenant. In cases rental levels can be determined by the profitability of the tenant.|
|The tenant usually takes pride in keeping the building look attractive for his own business purposes, and this reduces the overall maintenance costs to you. In many cases the tenants decorate and pay the outgoings||The landlord pays costs and repairs.|
|The buiding needs to be in a good location that is attractive to businesses, for instance is it in a secure, well lit area near main roads, with good parking and similar buidings around it?||Location is very important. You want to find a property in a good, safe area with good facilities nearby, such as transport, schools and shops. Places near a university or hospital seem to have a ready market.|
|2-3 bedroom houses or a family house appeal to a wider range of tenants and are generally more saleable than other types of residential property. Purpose built rental flats, like a block of flats, tend to be less expensive to buy in to, but they also have more limited appeal to renters and other buyers.|
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