What drives wealth in commercial property?

Wednesday, 4th Nov 2015

commercial front thumbThose who aren’t attune to commercial property may assume that wealth is created in the same method as residential property. However, this isn’t necessarily the case.

When it comes to commercial and residential property, both asset classes share similar macro-economic drivers, including population, income and economic growth as well as supply and demand factors.

However, the means in which wealth is created through commercial and residential property generally varies.

For example, commercial property typically generates net rental income of about 7-9%, while residential property typically generates net rental income of 3-4%.

On the other hand, residential property has historically recorded higher growth rates compared to commercial property.

Wealth is created in different methods dependent upon if you own commercial or residential property.

Below are the main points associated with residential and commercial property that typically affect wealth creation.

Residential Commercial
·         Generates lower income

·         Owner pays most expenses

·         Lower vacancy rates

·         Shorter-term tenants

·         Easier to finance

·         Higher historical growth rates

·         Generates higher income

·         Tenant pays most expenses

·         Higher vacancy rates

·         Longer-term tenants

·         Harder to finance

·         Lower historical growth rates

Generally, residential property is the best option as a starting point in property and during an investor’s accumulation phase (i.e. when they’re building their property portfolio) so they can continually leverage their equity to make their next acquisition.

Conversely, commercial property is the best option, generally, when investors are nearing retirement and need a source of income (i.e. they retire and use the rental yields as their disposable income).

Ideally an investor will retire with a balance of residential and commercial property and a solid income stream to set them up for life.