This is a question we get asked over and over again? Whether you are a novice investor or a seasoned entrepreneur there comes a time when you need to decide which direction to take Residential or Commercial. As with all investment decisions much depends on your investment goals. Here are some issues to consider:

Your Financial Position

Commercial Mortgages require the borrower to provide a much higher deposit than do Residential Mortgages. In most cases a deposit of at least 30% is required. If you are new to the investment game you are unlikely to have access to such funds. That is why most small investors stop at residential property.

The residential mortgage market is far more flexible. Mortgage rates are lower and even borrowers with a bad credit history, or no financials are able to obtain a loan. If you do not have a deposit as long as you have a strong income position you are able to borrow 100% plus of the purchase price of your residential investment.

Lenders are much stricter with commercial mortgages. Clean credit is always required and few lenders offer low doc mortgages. Commercial properties that are not under lease at the time of purchase may attract GST. Hence a purchaser of Commercial property may need to be registered for GST in order to have the GST on purchase refunded.

Capital Gain vs Higher Yields

Some people invest in property for capital gain and some for a regular income. In most cases you need to leverage Capital Gains against Higher yields as it difficult to find property that will offer both.

While the Australian residential market performs in a rather predictable fashion in terms of capital gain, this is less predictable for commercial property. Residential property on average is said to double every 7 10 years. Looking back over Australian property prices during the last 120 years this rings true time and again. However in recent times the residential yields have fallen and are in some shopping strips as low as 3%. The more land component the property has and the stronger capital growth it expected to achieve - the lower it seems to perform in terms of rental yield.

Commercial property is not all the same. There are different sectors such as retail, office and industrial property. Commercial investment is generally valued in terms of the yield it offers. However if the property has mixed use potential, a strong land component and is located in busy inner suburb shopping strip, you should be able to achieve both a mix of strong capital growth, and a reasonable rental yield. Specialised securities such as Nursing Homes, Petrol Stations, Kinder Gardens and the like can offer an excellent income stream while tenanted but if the tenant leaves may drop substantially in their value and could be difficult to re-lease. Therefore, commercial lenders will only offer 50-60% mortgages to purchase these.

In fact, if you are not sure how risky your proposed investment is, the best barometer is the loan-to-value (LVR) ration your lender will consider on a mortgage over this property. The lower the LVR, the higher the risk.

Tax Position

Commercial property has traditionally been used to reduce peoples tax burden. Commercial property can provide greater tax deductions than residential, through higher depreciation allowances. Tax advantages are even better when commercial property is bought through property trusts.

Strength of Lease

The nice thing about investing in commercial property is that the tenants generally pay your outgoings and the leases are typically much longer. You may have a tenant stay for 5, 10 or 15 years. However once a tenant leaves it may take several months or even years to find a new one. With Residential investment leases are typically shorter. On average tenants stay in their rental property 12-24 months. It is much easier to find a new tenant (a matter of weeks). You pay all outgoings including rates, taxes and body corporate fees.

Consider Property Syndicates

Traditionally syndicates are made up of a number of smaller investors who come together to invest a given amount of money for a set period of time for a specified return. Being part of a commercial syndicate can provide an investor with an opportunity to benefit from a high yielding property with a good capital growth. Generally such properties cost $10 million and up.

The main appeal of syndicates is that you are able to invest in commercial property at a fairly low cost level. As a small investor you can enjoy all the benefits of owning a large commercial property. The main drawback of commercial syndicates is their illiquid nature. The investors funds are locked in for a pre-agreed time. This can be inconvenient.

Research Investigate and Analyse

Before making any decision make sure you do your homework. You need to understand how commercial property market works in your city. Research the different sub-markets, areas, property types and zonings. Analyse the required investment, potential yield and expected capital growth. To make an informed decision you must understand your market and its inherent risks.