Why are Young Couples Flocking to Commercial Property?

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IN HIS BOOK Rich Dad Poor Dad, Richard Kiyosaki tells us: “You must know the difference between an asset and liability, and buy assets.”

Because “assets put money in your pocket.” Whereas, liabilities continually take money out of your pocket.

On that basis, you quickly realise your family home is therefore considered a liability — rather than an asset, or an investment.

And that’s simply because it continually takes from (without adding money to) your pocket, on a monthly basis.

Maximising their Returns

In the current market, that’s exactly how a growing number of young couples are beginning to view home ownership.

To make better use of their spare cash (and avoid the unknown vagaries of the sharemarket) they are considering two alternate choices:

  • Build up their super fund contributions for an improved position later on in life; or
  • Invest in commercial property to achieve a more immediate benefit.

And as you’ll appreciate, their decision turns out to be a rather easy one.

Why then Choose Commercial Property over Residential?

Probably, the main reason would be that your net return from a commercial property investment is effectively twice what you can obtain from a similar outlay for residential property.

Let’s assume you were to buy a house or apartment for $750,000 …  the rental you receive would be around $750 a week — or about 5% per annum gross.

From that, you need to deduct the rates, insurance, maintenance and management charges … leaving you with a net return of somewhere between 2.5% and 3% per annum.

In contrast with commercial property (where your tenants generally pay the outgoings), you can achieve a net return of between 6.5% and 7% per annum.

Some other Reasons Why …

In addition to your tenants paying the outgoings and maintaining the property for you, those leases are mostly 3 to 5 years — rather than the norm with residential property being six to 12 months. And that tends to provide you with a better continuity of income, over the life of your investment.

Furthermore, you enjoy significantly better depreciation benefits with commercial properties — because there are far more items you can depreciate on an accelerated basis. And naturally, that goes straight to the bottom line — to improve your overall net return from your property each year.

In Summary: What you’re seeing is savvy young couples putting their spare cash to work in a very tax-effective way. And then, looking to sell up down the track … releasing a greater equity to put towards a home, when they decide to start a family.



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Comments

  1. You’re right, there are some differences.

    Mainly, that growth for residential property tends to fluctuate dramatically. And unlike offices, is very sensitive to interest-rate movements. As such, commercial growth tends to be more predictable.

    Sometimes, vacancies can be a little longer – but that tends to balance out with lower tenancy turnover, where you enjoy 3-5 year leases for commercial property.

    And yes, you will need slightly more equity; but you will find the tax depreciation benefits are considerably better.

  2. While the above is strictly true – but I believe the capital growth associated with commercial is much weaker than residential. Thus when adding both net yield and net capital growth together – do these asset classes not even out somewhat?

    Also worth adding to the cons for commercial are:
    – the relatively higher risk associated with commercial (e.g. longer vacancy periods), and
    – lower leverage ratios (i.e. 30% deposits required rather than 20% for residential)

    This is my understanding anyway.

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