We’ve seen a lot of strength in commercial property over the past decade, and that’s got some property investors asking whether commercial is better than residential.
While it’s good that commercial property is on people’s radar, the reality is that they are looking at it the wrong way.
When it comes to pure capital generation, residential wins every day of the week because you need to put in less cash, you get more leverage, and it’s cheaper to do it.
Residential is great for building equity.
You can put in $100,000, get $600,000 from the bank, and have control of a $700,000 asset. That means your ROI is incredibly high because you’re making 7% on the full $700,000, yet your initial investment is only $100,000.
But as you go through your investing journey, that equation begins to change. That’s basically where I’m at now. I’ve got a lot of residential property that grows at 5 to 10 per cent per year.
On a $35 million portfolio, I’m making $2.5 to $4 million a year in growth.
However, eventually, you get to a point where you don’t need more growth because you’re generating enough.
That’s where commercial property comes in.
The advantage of commercial property is that you produce cash flow. Good commercial assets will have yields above your cost of finance.
That means you can use that excess cash flow to either pay down your debts or fund your lifestyle.
The catch is that you need a lot more cash upfront to get into commercial property. For the most part, lenders will require you to come up with something around 30% as a deposit, which is far higher than what we might see with residential property.
In recent years, the capital growth on commercial property has been impressive, particularly in asset classes like industrial. However, we are mostly interested in the cash flow side of the equation.
When we start looking at commercial property not as something that you are forced to choose over residential, but rather as something that complements residential, you open up a lot of options for yourself.
If you’re young and have good cash flow coming in from your job or business, then residential is a great starting point. You can put your money to work and build equity.
But over time, you need to start thinking about the next phase of your life. Commercial assets are incredibly appealing if you want an income stream to live off so you don’t have to work anymore.
It really helps give you that flexibility.
So instead of asking what’s better out of residential or commercial, start asking yourself where you are at in your working life and what you are hoping to do with your time going forward.
Engaging a trusted commercial buyers agent through Henderson’s buyers advocacy service is your best chance at navigating the competitive real estate market.
