The most common form of real estate that Australians invest in is residential real estate. Residential real estate is generally a more accessible form of real estate in comparison to commercial and industrial real estate.
Residential real estate also tends to be more of a safe investment in terms of finding tenants. However, this is highly dependent on the state of the Australian economy, as well as the demand for rental properties across Australia.
Residential real estate
Some of the pros of investing in residential real estate include:
Less vacancy risk due to the higher demand for rental properties
The potential to live in the property in the future if desired
A greater number of residential properties usually being available for sale
The opportunity to add value to the property through upgrades and renovations (e.g. adding an extension to the house to create another bedroom)
Some of the cons include:
Being responsible for all maintenance and repairs
Needing to choose between appreciation or cash flow (as properties with greater appreciation potential typically don’t have a large cash flow, whereas properties that have high cash flow typically don’t have great appreciation potential)
Lower rental yield in comparison to commercial real estate
The risk of problem tenants. Just because tenants are paying a decent rental amount, this does not always mean that they are going to take good care of the property.
Commercial real estate
Some of the pros of investing in commercial real estate include:
A strong rate of return on capital invested (with the return on investment usually being higher than that of other types of real estate)
Secure income stream
Often has very structured rental increases, which are included in the lease agreement.
Tends to have longer lease periods (ranging between 3 – 10 years on average, compared to 6 months – 1 year for a residential lease)
Leases are mostly transferrable
Not being responsible for the property’s outgoings, such as council and water rates (as the tenants are responsible for these)
Being able to add value to the property through the tenants, who are likely to make improvements that go hand in hand with raising the value of your commercial property (for example, renovating the face of the property to entice more customers, which in turn benefits both the tenant and the landlord)
A greater variety of properties available to suit a wide range of budgets
Capital outlay can be much less in comparison to residential property, meaning you can get your foot in the door with a much smaller deposit. Commercial real estate could be something as little as a car park, which can be found within the 5-figure range.
Some of the cons include:
More difficult to find tenants due to less people requiring commercial real estate in comparison to residential
Potential for significant financial impacts during periods where the property is untenanted Difficulty repaying debt due to income reduction caused by a vacancy
Fit-out contributions and incentives (rent-free periods)
Capital required to upgrade the building (e.g. upgrading the facade, roof, and services to comply with Australian building codes and standards)
Potential for change of laws governing operating hours (lockout laws)
Capital gains tax
Transaction costs
Industrial real estate
Some of the pros of investing in industrial real estate include:
Tends to require lower maintenance.
Industrial real estate demand is on the rise, in order to support the fast-growing demand by e-commerce companies. This outlook suggests that there will be more expansion and development opportunities for real estate investors.
Industrial leases are often 3 to 10 years; however, they can be up to 25 years. As a result, industrial properties tend to generate a stable and passive income for years. Industrial real estate means that you deal with large businesses rather than regular people.
Industrial real estate offers a wide variety of property types. They tend to be leased plain and empty, so that any business can rent the building and set up their processes and equipment with flexibility. This provides a large contrast to residential real estate options.
E-commerce friendliness attracts a different scope of organisations and businesses; these businesses currently are responsible for roughly 40% of industrial property leases. As technological advancements continue to rise, so does the demand for e-commerce business models.
Some of the cons include:
There is a level of financial risk involved, as with commercial real estate. This relates to the possibility of the tenant running into financial trouble during their business venture, which is a large deterrent for many investors. If the tenant can’t pay the rent, then the investor will still be required to meet their mortgage obligations.
The long-term nature of industrial real estate can be a drawback for some shorter-term investors (though this can be a positive for many investors.)
There are fewer industrial buildings for sale compared to residential real estate. Therefore, investing in this type of real estate requires more research into the somewhat niche property market.
Potential for long-term vacancy risk, as it can tend to be difficult to find new tenants. This is especially apparent at the end of a completed lease period. For example, if a tenant vacated a purpose-built industrial facility, such as a manufacturing building, the owner might need to invest a significant amount of money to make the property compatible for other potential tenants.
Raw land
Some of the pros of investing in raw land include that it is:
A less expensive form of real estate
Very low maintenance, with the extent of this limited to mowing the lawn and trimming back natural fauna growth
A blank canvas, which can be an attractive feature for many investors
Flexible in that you can choose what you build on the land (e.g. you could leave it the way it is, sell it to a developer, or build any form of residential or commercial property)
Can potentially offer long-term appreciation value. For example, you might purchase a large piece of raw land in an area that may not yet be desirable to property developers. As time goes by, so does the potential for the development of infrastructure, transport lines and residential properties. This in turn will potentially increase the value of your land as its desirability will increase.
Some cons are:
Little to no potential for passive income from owning raw land, as there are very few situations where people want to rent an unoccupied piece of land
A lot of research and professional advice will be required during the purchasing stage, as you will want to ensure you have purchased land in a good location for growth on your investment. Without proper advice and research, there is a possibility you could purchase land in a very low growth area, leaving you stuck with a poor investment.