This deceptively simple question actually can have a quite complicated answer, mainly because the nature of each investment carries with it an enormous number of variables and issues that must be considered. When providing property investment tips, most investment experts say that the answer will depend greatly on your strategic plan, whether you are a first time investor, your risk appetite and your overall budget.
While commercial investment property can provide high ongoing income because business tenants tend to pay higher rents, it also has a downside in that its potential for capital growth is much lower than residential real estate. This is because commercial buildings tend to be located in outer suburban areas where land values are low and the buildings depreciate in value over time. Residential properties grow steadily in value over time, and while they are susceptible to local market fluctuations in the short term, they provide good capital growth over a 10 to 15 year period. Rents for residential properties (and particularly inner city developments) also grow at a steady rate: last year, for example, there was an increase in the median rent for inner city apartments in Sydney reported, while rent for houses remained roughly the same as previous years[i].
Residential Property Can Be A Lower Risk Investment Than Commercial Property
Residential property investment is considered to be a relatively low risk way of capitalising on future capital growth in the property market as well as benefiting from regular rental income[ii]. Commercial properties and their rental returns are greatly affected by downturns in the local economy as well as the quality of the business that is renting it out. In the case of tenants moving out, a residential property may experience a few weeks where it is on the market (for which the investor should ideally have reserve funds to cover this shortfall in rent). While this can be a pain, it is not likely to put a great strain on your finances.
On the other hand, in commercial properties it can be a disaster for a business tenant to leave as the property may stay vacant for many months (or in the worst case scenario even years) before a new tenant comes along. In an uncertain economic climate many commercial properties will need to lower their rents just to attract potential tenants. Buying a commercial property as an investment is also generally not recommended for first time investors as they can be more expensive to purchase and to maintain, and the process can turn out to be far more complicated than buying a residential property.
Essentially, residential property investment – especially in new and off the plan properties – are recommended for people who:
- Are first time investors, who may not have the budget to buy a commercial property outright or have a large deposit for a down payment.
- Want to purchase a low maintenance property
- Want a relatively low risk investment that will grow over a 10 to 15 year period and provide steady rental incomes
If you are looking at purchasing a residential property such as an off the plan development for investment purposes, consider talking to an experienced property investment company such as Ironfish. They will be able to assist you with all aspects of property investing including finding the right property and investment management.