Whether to invest in residential or commercial property depends on a range of factors, such as your goals, risk appetite and financial circumstances.
If you want to invest in property in Australia, you have two broad options – residential or commercial. It’s crucial to understand the key differences between investing in each so that you can make the best choice for your specific financial needs and goals.
This is the most obvious difference. Commercial properties are used for business purposes, either by business owners or their tenants. For example:
Residential properties on the other hand are where people live, either as owner-occupiers or as tenants. For example:
Many people have an understanding of residential properties simply because we all live in one. Investing in residential property has long been viewed in Australia as a sound way to accumulate long-term wealth.
According to the latest figures:
However, far fewer people have direct experience with owning or renting commercial properties. Investing in any type of property requires specific knowledge and research to ensure you make a sound investment. Let’s take a look at some of the differences between the two options.
Commercial property lease agreements tend to be more complex than residential agreements and they usually require a legal professional to tailor them to the specific characteristics of the commercial property, for example regulations on the types of businesses that can operate from a commercial property.
Residential lease agreements are generally standardised with some variations in each state, with common terms for both landlords and tenants.
In recent times, tenant vacancy periods on commercial properties have been longer than for residential properties, especially during the current housing crisis in Australia that has residential vacancy rates at record lows.
The sight of vacant commercial properties is not uncommon, with many businesses impacted or still in recovery post pandemic and while the economy features pressure on cost of living for consumers. Of course, this is all relative to industry.
Because the commercial property market is dependent on economic conditions, it can be a riskier investment than residential property. You need to generate higher commercial property returns to compensate for this higher risk.
As residential property is generally seen as a safer investment than commercial property, lenders will:
With commercial property finance, you will:
History shows that Australian property prices in good locations have a long-term growth trend for the past three decades. The capital growth of commercial properties on the other hand has tended to be more volatile over the same period in line with economic fluctuations.
There are different tax implications between investing in commercial and residential property. For example, you will usually be charged 10% GST (goods and services tax) on the selling price of a commercial property, but you won’t be charged GST on the sale of a residential property.
Both residential and commercial properties are subject to Capital Gains Tax (CGT) if you make a profit on their sale, though a range of CGT discounts are available. You should seek professional advice on the potential tax implications of both types of investments based on your specific financial situation.
Whether investing in residential or commercial property is the better option for you depends on a range of factors such as your investment goals, risk appetite and financial circumstances. In recent times, residential property as an asset has proven to be successful for many Australians, supported by strong capital growth and high rental demand.
The information provided is general in nature and should not be taken as advice. It does not consider your personal circumstances, needs or objectives. We recommend seeing your accountant to determine the best strategy for you.
If you prefer to have a strategy in place before starting your property investment journey, this is for you. In this article we outline 6 key property investment strategies successful investors use to maximise their returns.