Choosing Between Commercial or Residential Real Estate

Most property investors will ask themselves at some point whether they should invest in commercial or residential property. In fact, it?s quite a common question, and the answer always remains a resounding ?it depends?. While both types of property investments can offer exciting opportunities for potential gain, how well you are suited to one or the other completely depends on your financial circumstances, your business knowledge, and your personal investment goals.

There are two sides to every story, and both residential and commercial property investments offer their own positives and negatives. If you are finding yourself in the same boat as many others and are wondering which investment is best for you, then read on for some pros and cons of each.

Pros:residential investment

1. Property shortage. Currently, residential property is undersupplied with respect to demand, which is evidence that residential investments will continue to enjoy capital growth for the time being. The same goes for vacancy rates as well.
2. Access to credit and leverage. For residential investments, banks are willing to lend at a higher loan-to-valuation ratio and at lower interest rates.
3. It?s Simpler. If you?re a beginner investor, then this point geared towards you. Residential investments are generally simpler to run, especially since it?s so easy to find tenants these days.

Cons: residential investment

1. Lower yield. Pound for pound, residential investments can expect lower returns than commercial property.
2. Passing on costs. With residential property, you will have a far more difficult time of passing on costs. This means if utility and maintenance fees go up significantly, and you?re bound by a rental agreement, you will end up eating the new costs. This is something you don?t have to worry about with commercial.
3. Mortgage overhang. As interest rates rise, mortgage defaults may affect the value of surrounding properties, in turn affecting the value of yours.

Pros: commercial investment

1. Higher yields. When a commercial investment does well, it really does well. You could expect to see higher annual returns than with residential property depending on the type of tenant and the terms of the tenancy.
2. Business owner benefits. If you invest in commercial property to house your own business, then some fantastic tax advantages become available to you.
3. Long-term leases. Commercial leases are usually much longer than residential ? typically several years long as opposed to 6-12 months. This gives you greater certainty for rental income for a longer period of time, as long as you can shoulder the risk of longer potential vacancy periods.

Cons: commercial investment

1. Reliant on tenant success. A large number of start-up businesses fail, and relocated businesses are at a higher risk as well. So as the property owner, you need to be concerned about whether or not your tenant?s business will succeed.
2. Lower capital gains. Historically, commercial property owners have not enjoyed the same level of capital gains as residential investors have.
3. More expertise is needed. Given how many more risks are involved in commercial property investing, and more complex issues, you need to have a far higher level of expertise to be successful.

As with anything, there are pros and cons to both residential and commercial property investments. How you decide to weigh them, however, will depend a lot on your level of experience, your confidence, the real estate market and your own finances. If you play it right, either investment has the potential to do great things for your money.

Source: http://blog.dpn.com.au/choosing-commercial-residential-real-estate/

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