Investing in real estate comes with a host of benefits which can include solid returns, tax advantages, predictable cash flow, and capital gains. Typically, a less volatile investment, buying property can be a stable investment if you know what you are looking for. We explore the differences between investing in commercial and residential properties, to help guide you on which option best serves your investment needs –specifically to investing in Byron Bay.
*Disclaimer* always seek individual financial advice. This article is intended to guide you; however, please note that the content may not necessarily apply to your case.
First, what is the difference?
Commercial properties are primarily used for business purposes such as office space, retail fronts, restaurants, or industrial warehouses. Residential properties are used as homes, including holiday lets and longer-term leasing.
Commercial Investment Opportunities
Let’s jump straight into the benefits of buying a commercial building.
Lease terms
Leases play a crucial role in determining the value of the building.
The value is usually established by rental return or the potential for capital growth. A residential house is worth much the same whether tenanted or not. Therefore, a solid commercial tenancy, let accurately at market rate and accompanied by a steady economy, can increase the value substantially.
A huge advantage of owning a commercial property is the longer lease terms. Leases generally range between 3-6 years in Byron, providing better security and less admin – especially when you have a good property manager taking care of everything on your behalf!
Inflation Protections
Several inflation protections are built into commercial property leases that help maintain (and even increase) the value of commercial properties considering the impacts of inflation.
Landlords set annual rent reviews to evaluate rental increases based on a changing economy using the CPI - Consumer Price Index. The government set CPI each year to control inflation. Rents ordinarily increase annually with CPI, creating security for both the landlord and tenant.
Low expenditure
Furthermore, within the lease, mechanisms are used to pass certain expenses and charges on to the tenant, who is then responsible for such outgoings. This provides the landlord some protection against any rising expenses.
Costs involved in the fit-out of the interior are the tenant’s responsibility too; because they own all the internal fixtures and fittings, it is their job to maintain them. Essentially, the landlord is only supplying the outer shell, whilst the tenant takes care of the content.
This significantly decreases the maintenance responsibilities of the landlord and means less of the landlord’s assets are at risk of damage.
Limited Zoning in Byron Bay
Being surrounded by stunning coastlines and protected nature reserves is aesthetically pleasing whilst equally working in the favour of commercial property owners.
Byron’s limited supply of commercially zoned land due to limited space means that area experiences low vacancy rates. And re-letting properties is a relatively quick process.
It’s a different story in the bigger cities where the urban sprawl stretches for miles offering more choice.
The limited zoning can offer you some protection on your commercial investment in Byron as the demand outweighs the supply. Supply and demand play a key role in the value of residential and commercial properties; driving demand keeps the market healthy.
Tax benefits
Substantial depreciation allowances and tax benefits are a bonus to consider with commercial properties. Depreciation is a lucrative deduction available to owners of income-producing properties. Legislation governed by the Australian Taxation Office (ATO) states commercial property owners can claim deductions on expenses relating to the period their property is rented or available to rent. Expenses for the maintenance and management of their asset such as leasing agent fees, council rates, repairs to new assets, replacing smoke alarms, and interest on loan repayments, could be claimed.
Higher rate of return
A combination of capital gain and income has seen strong returns for commercial property across Australia in recent years.
General returns (or yields) reach around 5% for commercial investments in Byron, surpassing its residential counterpart offering around 3-4%. This can make commercial investments more cash-flow positive.
The value of commercial properties is based on the rental return, therefore appropriately increasing the rent can increase the value. Using an experienced commercial property agent can help maximize your returns by providing an accurate rental appraisal relevant to the market at the time.
Other markets might achieve a higher yield because of more stock in the area. More stock means competition drives property prices down. Lower mortgage outgoings create a greater yield from the income of a lease. However, more stock also results in longer vacancy rates. With more choices for tenants, you may require a cash buffer until you find an occupant to start profiting from an income.
Perks of Commercial Tenants
As your commercial tenants conduct their business from your property, usually they take better care of the place, especially customer-facing businesses."
The type of tenant can increase the appeal of your property too. A thriving business, with a stylish fit-out, can help similar businesses picture themselves at your property. If your current tenants leave, you could have a queue of tenants eager to get a foot in the door.
Another perk for commercial landlords is the less demanding maintenance of commercial leases. Due to certain tenant responsibilities included in commercial leases, commercial tenants are generally low maintenance in comparison to residential tenants.
Investment control
Unlike the stock market, there is a significant degree of control over your property investment. Whilst you can choose to improve your return through renovations or upgrades, the biggest draw card in controlling your return is the terms of the lease. As the value of the property is impacted by the rental income, your control of the lease terms can be massively advantageous when carefully considered.
Pluses to Residential investments in Byron
Stability of income
In Byron Bay, there is high demand for residential properties. Everyone wants to live in the bay, and locals always need a place to live therefore the demand remains consistent.
Economic downturns usually have less impact on residential property investments, therefore whilst the market can fluctuate, the call for homes provides investment security and stability.
Limited stock & low development - Specific to Byron Bay
Much like commercial investments, buying residential property in Byron Bay offers protection on return based on the limited land available to develop new accommodation. Supply and demand are big contenders in the profitability of your property, therefore choosing an established location, although potentially expensive initially, can be advantageous in the long run.
An area with no future for developing infrastructure and new land estates will help keep the market competitive and healthy for investing.
Summary
It’s always important to apply this information relative to your buying market as there are many factors that pertain to property investment.
Strategic preparation and planning with the assistance of industry experts, who are up to date with current market knowledge, is highly recommended
At Byron Bay Property Sales, the team encompasses all aspects of buying and leasing in both commercial and residential real estate. With over 80 years of combined industry experience, the team is here to help you determine what type of property delivers best for your investment needs.
What’s more, with the confidence of professionals behind you, you could transform your investment into diversifying your portfolio with a combination of both residential and commercial! Nonetheless, whichever path you choose, the important thing to remember is that they can both offer great forms of income and capital gain, which is ultimately the goal of investing!
Written by Kerry Mullany
