EMail Newsletter

May 2006

Commercial v Residential Investment

This discussion comes up on a regular basis, with clients looking for the best investment options to suit their situation.  Commercial property has a number of appealing characteristics.  They usually offer a higher rental return, a longer lease term, and the tenant often pays for many of the day to day maintenance costs that an owner would usually be liable for.

However (there’s always a downside isn’t there) while commercial properties offer longer lease terms, they can also be vacant for much longer that a normal residential property, putting pressure on the owner who may still have a large mortgage commitment and no rental income.  (Remember, a five-year lease doesn’t help if the tenant goes out of business after two years).  Commercial properties usually have a longer selling cycle if you decide to pull the plug.

Serviced Apartments

Serviced apartments are more difficult to place with lenders, but we do have options available.  Typically, a block of serviced apartments are all owned by different people, just like a regular block of units.  A management company rents out the apartments like hotel rooms and the pooled money is shared between the owners of all apartments in the complex.

The problem for lenders lies in the management agreement, which often locks the apartment into the rental pool for anywhere from 6 months to 2 years.  This means that the apartment can only be sold on to other investors, leaving the lender with fewer options if they ever needed to sell the property.  If you are considering purchasing a Serviced Apartment make sure you discuss the financing issues with us before you make a decision.

Where is my Tenant

One of the biggest concerns for potential investors is the possibility that their property will be untenanted for a considerable amount of time.  Experienced property investors will tell you that it’s not as big an issue as you would think.  However, there are some simple strategies you can follow to make sure you are not left tenantless. 

• Buy a “standard” property in a typical residential area.  Exotic properties like inner-city penthouses or acreage may not be as attractive to tenants as standard two-bedroom unit or four-bedroom house.  If you can picture a mum and dad and two kids living in the property then you are on the right track.
• Drop the rent by $10 a week.  Two weeks lost rent at $200 a week is a $400 loss.  Dropping the rent may make your property more attractive to potential tenants, and it would take 40 weeks at $10 a week to make up the difference.
• Keep your property in good condition.  A few hundred dollars on cleaning and basic repairs is worth the investment if your property is rented out a few weeks sooner.
• Allow for some “down-time” when you are doing your sums.  A typical investment property will be rented out for between 48 and 50 week in the year so allow for some vacancy and keep some money aside to cover your loan payments during this time.

Sydney vacancy rates are currently around 2.1%.(down from 3.4% two years ago).  If your property was vacant for two weeks out of 52 (or 4% of the year) you would have more that paid your dues to the vacancy gods.