Should you buy residential or commercial property in today's market?

It all boils down to examining two key factors – your personal objectives and your appetite for diversification.

Currently, despite the covid landscape reset, both the options of residential property investment and commercial property investment present strong opportunities.

So, how to decide between these two potentially advantageous prospects?

Residential property has traditionally been reliably safe, particularly around Bayside Melbourne.  However, like Commercial property, when contemplating residential, it’s important to delve a little deeply to understand which part is performing best. Clearly the land component is the one that goes up in value. So, buying residential houses close to the beach and the bay-side suburbs all the way down the peninsula, is always going to be a very safe bet.

What about commercial property as an alternative investment? The demand for industrial property at the moment has been very solid throughout the COVID period and it’s continuing to stay that way. It is likely there are going to be increases across the board within the commercial property asset categories, but the strength lies in industrial.

Let’s consider the 2 key factors to clearly identify-

As a purchaser, first stop is clarifying your central objective – what you wish to achieve from that investment. Naturally this question will depend how much capital you can raise and capacity to find enough funds for the deposits and the demands of the ongoing costs of that investment.  If its less maintenance, more predictable outgoings and steady reliable rental return, the residential investment might  feel safer, and easier to factor in. Decide if you are looking for that set and forget no fuss investment? That’s the idea of just buying it, collecting rent and never hearing from it.

If your central objective is higher returns, the commercial property investment presents more opportunities. Some of the options might be – to start off in a small warehouse. Or a retail shop. Or a small size office that you can use later on for your own business. If a simple safe bet is your central objective, then in the industrial sector, that warehouse of one hundred to 600 square meters is always a hot demand property type.

However simply because you like the look of it, or it’s close to your home, may not equate to providing you with the best opportunities in the future. So, a further dive into your future needs is advisable. How long you are looking to hold that property, are you looking to renovate it and flip it, or chop it down from a thousand square meters down into little factory units? What are some other considerations? Then there’s the rental return consideration. i.e is that current tenant paying a market rate? What are you going to receive in rental in three years’ time if they vacate, how easy is it going to be to lease? And what type of tenants are you going to secure in the future? Great location properties, whether it’s a retail shopping, a small shopping strip or in a very large shopping strip or an industrial factory in the middle of an industrial zone such as Moorabbin all represent very different markets. They all source very different tenants. So, there are various levels of demand for each of those. Therefore, it comes down to really working out who is your tenant going to be in the future and the ensuing demand that will create for your ideal property.

Secondly, what is your appetite for diversification, and does it require reviewing?

Residential investments alone may feel safer, due to what we grew up with, our previous experience or the results we are aware of around us. It may feel more comfortable if you own one residential property, to purchase another residential property using that equity. In that case you’ve got to keep funding residential at a lower return, and you’ve got to keep finding more income and funding, to pay for two or three different residential properties. Here’s where the advantage of diversifying your portfolio kicks in. If you start mixing that with some commercial industrial property, you are likely to reap a much higher return. If with good advice you buy well, you will be receiving rent on top to cover more than the loan. So you can start to then move that payment across to pay for some other commercial properties. And that’s why, diversification across the asset categories in commercial is a balancing act but can really help you to stay ahead all the way.  An example of this strategy is to look for the smaller industrial properties which are in in hot demand. However maybe you have to look for that little diamond in the rough that you can renovate and fix up. The trend is increasing for tenants in retail moving across into industrial sectors. More and more new businesses are starting. Trades are always looking for industrial properties. Demand for renting them is huge.

So, given the trends in industrial property demand, diversifying your portfolio across the commercial asset categories is a very wise strategy.

Critical then is clarifying your future personal property investment needs and understanding how diversification across the commercial sector can help you achieve them.

Insights from Matt Brown – A director at Tsimos Commercial Pty Ltd