When it comes to property investing, most Australians set their sights on residential property, but investing in commercial property is another way many are building their wealth through brick and mortar.
Of course, investing in commercial or residential real estate comes with risks and Shane Oliver, AMP’s chief economist and head of investment strategy, said the biggest argument in favor of investing in commercial real estate versus residential was a higher income stream.
“Like all real estate, it depends on where you go. For example, you get exposure to a larger part of the economy by going commercial,” he explained.
“In other words, you get exposure to industrial, office, retail and mixed, while with residential construction you are only exposed to the housing market.
“There is a potential for more diversification in terms of economic exposure in the commercial real estate market than in the residential market.”
Interest rates and loan differences
Melbourne-based Mortgage Choice broker Joshua Almond said when purchasing a commercial property, the deposit required differed significantly from a residential purchase.
“As a general rule of thumb, you’re probably looking at a 20% contribution when it comes to purchasing a home,” he said.
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Mortgage Choice broker Joshua Almond.
“From a commercial perspective this could be anywhere between 25% and 35%, plus the cost of stamp duty.”
Another major difference between commercial and residential loans was the interest rates.
“I think a lot of people are probably not aware that you’re probably going to pay a high interest rate for (commercial) … which ties in with what the banks consider high risk,” Mr Almond said.
“Their thinking is that in the unlikely event of default, and they have to move or sell the property, it will likely take longer to sell that property, which in some ways is considered more specialized compared to, say, a residential property in Perth.”
The loan terms for a commercial loan were somewhere between 10 and 15 years, compared to 30 years for a home loan, he added.
“The one thing that banks have done quite well over the last decade is that they have started to align some of these mismatch items — that is, loan terms and interest rates — closer to what a home loan looks like,” he said.
“Some banks take out commercial loans and borrow over a longer period, so between twenty and thirty years.”
Commercial investment loans are significantly shorter than regular home loans. Photo: Getty
Mr Oliver said commercial property growth had tended to be more in line with inflation, and was more likely to suffer from periods of oversupply.
“It is arguably more sensitive to the state of the economy than housing,” he added. “You can get a little more volatility in commercial real estate than in residential.”
There was the argument that residential investment was probably easier for most investors to understand, he said.
Tax benefits
Both investment types have similar tax benefits, Mr. Oliver explains.
“You can negatively gear both because the nature of the tax system allows negative gearing. Both have access to the capital gains tax credit, so there are no real tax differences at a high level, although you may find some if you look deeper into it.
“But in terms of the big picture around capital gains and negative gearing, they’re both quite similar.”
Customized approach
Mr. Almond said the most important thing he lets potential clients know when it comes to commercial lending is that one size does not fit all.
“The big discrepancy between the interest rate, the term and the contributions of the loan, all three of these things, can depend on whether you are buying for your own purposes, to live in or as an investment.
“And it can also vary depending on the type of assets you buy.
“So an industrial warehouse, or an office, or a retail store, all three will dictate, or banks will dictate how much you have to contribute, what the interest rate may look like and what the term of the loan looks like.”
Industrial warehouses are a popular asset type among commercial real estate investors. Photo: Getty
It’s these factors that make it crucial to talk to a real estate agent, Mr. Almond added.
“Even from an investor perspective, usability is probably looked at and looked at in much more detail, including from a home loan perspective,” he said.
“Mom and pop investors coming in, or first time commercial real estate buyers coming in and thinking it’s a similar process, it’s not.
“We’re taking away a lot of that challenging stress. We’re going to understand what a client can and can’t do and help.”
This article first appeared on Mortgage Choice and is republished with permission.
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