Property Investment
Information for Property Investors
In this section
- Commercial vs. Residential Property - Investment Pros and Cons
- Positive vs Negative Gearing
- Tips for Investing in Property
- Use Viking to Buy Property
Commercial vs. Residential Property - Investment Pros and Cons
Most people think of residential property when they're thinking about investing, but commercial property has its rewards too.
The benefits of investing in commercial property
Leases tend to be much longer - anything from three to 20 years - and they are quite often secured by bank guarantees, which makes them a secure investment Rent is reviewed annually and is usually increased either by the CPI or by 4%, whichever is the greater.
Commercial tenants will also tend to maintain the property better as the look and condition of the property is important to their business and their staff. But commercial leases also have added protection for the owner in the form of make good clauses, maintenance clauses and management clauses.
The return on invested capital on commercial properties ranges between 7% and 10% net after all costs. Residential property investors must pay all outgoings and other costs, although of course this can be negatively geared. Deductible rates on commercial property, though, are higher than for residential because of higher depreciation rates.
The benefits of investing in residential property
You need a smaller deposit, which can be important in particular if this is your first investment property. Depending on your credit history and income, you can even borrow 100% of the purchase price. Commercial mortgages require a deposit of at least 30%. Rates on residential mortgages also tend to be lower.
Lenders are much stricter on borrowing criteria for commercial properties and if the property is not let at the time you purchase it, you may have to pay GST.
The commercial property market can be less predictable than the residential market (where historically properties tend to double in value every 7 to 10 years). There are also different kinds of commercial property to consider such as commercial, industrial and retail.
With proper research, you may find that you are more comfortable making the decision about which type of property to invest in. Although residential leases are shorter than commercial ones, residential properties are generally easier to let, meaning you will have less time when the property is vacant. It can take months to find a new commercial tenant. Whether you choose residential or commercial property, the more you know about your market, the safer your investment will be.
Positive vs. Negative Gearing
Keep in mind that the interest and related expenses you incur (such as repairs and maintenance) are tax deductible. Negative gearing means your loan repayments, fees and other costs exceed your rental income. This means that the net loss can be offset against other income you earn, so you will be able to reduce the amount of tax payable on your other income.
Positive gearing, on the other hand, is where the annual rental income received from the property is higher than the annual loan repayments and costs. The benefit here is that you earn extra income, but of course this is taxable. Also make sure you factor in the capital gains tax you will have to pay if you decide to sell the property. Be sure to consult your taxation advisor.
Take control of your investment by being properly informed on property values, trends and what is happening in the market. Viking property can give you insight into how these can work for you.
To research the areas you are interested in, read property-related articles, use reputable property research companies and the Real Estate Institute of Australia, search the Internet, plus talk to people in the know. Find out each area's average rental yields, what services infrastructure is in place and planned, and the property price growth that has been experienced and is expected. Invest the time to fully understand the market, it could make a big difference to future investment returns.