Insights · Property and lending
Commercial vs residential property: which suits you?
Most people’s first investment is residential. Commercial property, such as offices, shops, warehouses and factories, works quite differently, and suits a different kind of investor. Here’s how they compare.
Yield and income
Commercial properties usually produce higher rental yields relative to their price. Leases are often net, meaning the tenant pays most outgoings such as rates, insurance and maintenance, which makes the income cleaner.
Residential yields are usually lower, and the landlord pays the outgoings. In Sydney, residential investors typically rely more on capital growth than on rent.
Leases and vacancies
Commercial leases commonly run three, five or ten years, with built-in rent reviews. A good tenant on a long lease is very stable. But when a commercial property is empty, it can stay empty for months, sometimes a year or more, with you paying the outgoings and the loan.
Residential leases are usually six to twelve months, so tenants turn over more often, but demand is broad and vacancies are usually short.
Lending
Commercial lenders usually lend a lower proportion of the value, often 60% to 70%, charge higher rates, and look closely at the lease, the tenant and your own financials. Residential lenders will often lend 80% or more on a standard investment property.
Tax and GST
- GST. Commercial property sales are generally taxable for GST unless sold as a going concern with a tenant in place. Commercial rent is subject to GST if you’re registered (required once your commercial rent reaches $75,000 a year). Residential rent is input taxed: no GST charged and none claimed.
- Depreciation. The 2017 restriction on second-hand fixtures applies to residential properties held by individuals, not to commercial property. See depreciation on new and established properties.
- Land tax in NSW applies to both, once your total land value exceeds the threshold.
- Capital gains tax works the same way for both, with the 50% discount for individuals who hold for more than 12 months.
Risk and liquidity
Commercial property is more sensitive to the economy. A downturn can mean a business tenant fails and a replacement takes time to find. The pool of buyers is smaller, so selling can take longer.
Residential property has a much deeper market of buyers and owner-occupiers, which usually makes it easier to sell.
The business owner’s option
If you run a business, buying your own premises, personally, through a trust, or inside your SMSF, combines both sides: you control the tenant (your business), and the rent goes to you rather than a landlord. See should I transfer my business property into my SMSF?
Which suits you?
Commercial tends to suit investors with a larger deposit, a longer time horizon, and the cash to ride out a vacancy. Residential tends to suit first-time investors and those who want steadier demand and easier finance.
Either way, the structure you buy in, the loan, and the tax treatment are worth getting right before you sign. Judge Lending arranges commercial and investment loans, with your accountant involved from the start.