Commercial property includes a variety of property types. Some are obvious while others may not be as well known. Many people who have invested in residential property are hesitant to invest in commercial property because it seems like a more complicated process. If you know what commercial property is, however, and why it makes an attractive investment, you will likely be more open to investing in commercial property!
There are three main types of commercial property which almost everyone is aware of. These include:
l retail property - shopping centers, strip shopping, stand-alone shops
l office property - medical centers, office buildings, strata offices
l industrial property - factories, warehouses, workshops, distribution centres
Other types of commercial property, still fairly well known but perhaps not as obvious at first glance, include:
petrol stations
restaurants
hotel and motels
parking stations
storage facilities
There are also ‘composite’ properties that are categorized as commercial. These are properties that have more than one use, such as a building with a retail store on the ground floor and a residential apartment on the first floor. In large cities you would notice even larger composite properties that include car parking, retail shops, serviced apartments, residential apartments and offices as part of the one property!
What Makes Commercial Property An Attractive Investment?
Other than the different uses for the different types of property, what are the primary differences between owning residential property and owning commercial property?
If buying a home for yourself and family, your main consideration is usually to have a comfortable home in a neighbourhood that’s a desirable place in which to live. It's a decision you make with your heart and emotions, as well as for practical reasons of convenience to facilities such as schools, shops, medical support, etc.When buying residential property as an investment you have different criteria. You want to know how much money you would earn by renting the property and whether the property will increase in value over time (and by how much). You aren't as concerned about the residential investment property being located in an area in which you would choose to live personally, because it's more about the money potential.
Similarly, investment decisions about commercial property are made with your head, rather than your heart and emotions. They are based on the bottom line financially, or the rental income that the property can generate and how secure that income will be.
The tenant and the lease terms the tenant signs are vital factors in deciding whether or not a commercial property is going to be a good investment or not.
In a well structured commercial lease the owner can secure:
fixed term of tenancy
specific rent review periods
specific basis of review, such as fixed increases, review to market, review to CPI (Consumer Price Index), review to an additional, specific percentage, or any combination of the above.
An important difference that makes commercial property a good investment when compared to residential property is that the operating expenses are almost always paid by the tenant. This is spelled out in the lease agreement. Also, as the costs of maintaining the commercial property increase, the tenant is usually required to meet these increases. This helps you maintain your bottom line.
With commercial property investment you have a substantial degree of certainty in regard to the net annual income from the property.