Residential v Commercial Property Investment
This is an excerpt from Chapter 6, ‘Residential versus Commercial Property Investment’, of Frazer’s upcoming book, The Alternative Guide To Property Investment. You can register your interest in pre-ordering the book by clicking on the button at the bottom of this post.
We have discussed the residential property investment sector at some length, but commercial property can be an excellent addition to a healthy investment portfolio if you are looking for consistent, steady yields alongside a decent level of growth.
Commercial real estate has shown long-term positive performance, with combined annual returns averaging around 9% depending on the area and type of property.
The steady and predictable cash stream potentially afforded by rental income from commercial property translates to possible protection against volatility in financial markets.
Here are some reasons why investors may find commercial property attractive:
- Historically strong returns – With an average annual return of about 9% over a 20-year period commercial real estate has performed well historically.
- Rental income from stable commercial properties means a potential steady and predictable cash stream (translating into possible protection and diversification during financial market volatility).
- Beneficial taxation – When structured properly, commercial property can offer investors a number of tax benefits.
- A hedge against inflation – A potentially important factor for your portfolio, since property normally benefits from inflation.
- Ability to leverage your capital – As with residential property you can obtain mortgages and potentially multiply your ROCE (return on capital employed).
- Diversification – There is no direct correlation with the stock market and you can further diversify within the asset class itself.
These are some of the different types of commercial property into which you can invest and spread your risk:
- Office property (either prime or secondary);
- Industrial property: Warehouse and manufacturing units; heavy manufacturing; light assembly; ‘flex’ warehouses (mixed industrial/office space); and bulk warehouses, like distribution centres.;
- Retail: Individual shops,takeaways, shopping centres, etc.;
- Multi-unit apartment buildings/HMOs: Although providing homes, these are treated as commercial premises;
- Self-storage: Self-contained units rented to tenants for storage of material items, usually on a monthly basis;
- Hotels: Bed and breakfast, small boutique hotels or big-name establishments.
However, property investors when they start investing seem to prefer residential, perhaps understandably, as it falls more easily within their knowledge base and comfort zone.
The philosophical difference between residential and commercial is that when you invest in residential property, you are essentially transacting with individuals – it is a much more personal transaction especially as people will be living in your property and making it their home.
To read more about why to invest in property, you can click below to register your interest in the book. Fill in your details, and once the book is released, we will send you more information.