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Nowadays, more and more property investors are attracted to invest in Melbourne real estate. However, many are still unfamiliar with knowing how or where to start, or what type of property they should be looking to buy.
1.Commercial or Residential, what’s the difference?
In Melbourne, and throughout Australia, commercial properties cannot be used for residential purposes unless special planning approval is granted. Commercial properties are divided into three categories: retail, office, and industrial.Commercial properties are generally for business use and include shops, offices, factories, shopping malls and industrial.
In a similar way, residential property is reserved for human occupation and generally running a business from a residential property is prohibited, however the are some exceptions for owners (Check planning requirements with the local authority). Some properties fall into a ‘Mixed Use Zone’, where both residential and commercial use may be allowed.
Experienced or bigger investors may prefer Commercial property. Whilst they tend to be much more expensive, they generally provide a greater net rental return. They have longer leases and most times the tenant pays the property expenses or ‘outgoings’. On the negative side, if the tenant vacates it can take some time before a new tenant is found, which may place the owner underfinancial strain.
Smaller or inexperienced investors may be wise to start with a residential investment. These are generally less expensive than commercial and whilst mostly providing a lower rental return, the risk of long-term vacancy is vastly reduced, providing greater financial security for the owner.
2.What does rental return mean?
Rental return is the income you will derive from your investment property. When considering an investment property, buyers would be well advised to consider the NET rental return to properly distinguish between the various options under consideration.
In Melbourne, houses generate a gross rental return of approximately 3-5% whereas CBD apartments may generate anywhere from 4-8%. Most commercial investments can tend to generate anywhere between 5-8% net returns. The location, building type and quality and market conditions at that time of purchase will usually always impact on rental return.
3.Which type of Melbourne property has the higher rental income?
Usually commercial properties in Melbourne cost more and have a greater net rental income. Under most commercial leases, theproperty expenses or outgoings, such as municipal taxes, maintenance fees and property management feesare all paid by the tenant. Residential property generally provide a lower net rental income, as part of the property expenses must be paid by the landlord, but they are generally considered a much safer investment and therefore more ideal for the smaller or inexperienced investor.
4.What if the tenant does not renew the lease?
For residential properties, if the tenant does not renew their lease and vacate the property, your agent will usually find a new tenant quite quickly, so the risk of mortgage stress can easily be managed.
With commercial property, finding a new suitable tenant may not be quite as simple. Whilst the leasing period for commercial properties be much longer than for residential, the vacancy period when a tenant vacates can also be far greater. Vacancy rates for commercial properties are quite volatile and can be a major problem in the Melbourne real estate landscape. If you choose to invest in Commercial property, you may be required to meet the mortgage liquidity for long periods of time if your tenant vacates!
5.Checking your lease agreement
Whether you invest in Commercial or Residential property, always check your lease agreement very carefully! In the Melbourne real estate market, lease agreements for commercial properties are much more complex than for residential properties. Make sure you understand your lease agreement fully. If you have any questions, always seek professional advice from your solicitor or your agent.
For further enquiries, please do not hesitate to contact us at Elite, where our professional Sales Consultant and experienced Property Managers will assist you with any queries you may have.
Call us anytime on 1300 354 839 for more information and advice.