Does Commercial Property make a good investment for me?
In many cases, I believe that the answer may be YES.
Perhaps a better question to ask may be “When is the right time to invest in Commercial Property?”
You see there are many different aspects and considerations you need to understand when you consider investing in Commercial property over a standard Residential property.
Perhaps the biggest difference is the contrast in Capital Growth.
This is very important to understand, as it is capital growth increases your wealth faster than anything else will.
Here are my thoughts around Commercial Property and the right time to consider adding it to your property portfolio.
First, it is important to understand the performance of the two differing asset classes, here is a long-term snapshot of returns for both Cashflow and Capital Growth;
As the table shows, you will generally receive higher capital growth for Residential Property, but overall the Income (cash flow) will be less.
This is important to understand as the higher the compounding capital growth, the faster and the more the asset will appreciate over time.
While lower Cashflow may be perceived as a negative, there are some underlying positives;
- Lower risk investments generally carry lower yields
- Lower yielding investments also carry greater predictability and certainty
- Returns are still two to three times better than a bank savings account
- Much higher Capital appreciation
For these reasons, accumulating Residential property makes the most sense when you are beginning to build an asset base.
Superior capital growth, low risk and predictability are ideal tools to build upon and create wealth.
Added to that, at the end of the day, everyone has to live somewhere!
Conversely, Commercial Property is pretty much the opposite of Residential Property when analysing over the longer term.
There is significantly less capital growth, but a larger portion of income (cashflow) from this type of Asset.
This makes sense, as the higher rent is to cater for greater risks involved and the increased amount of volatility.
Unlike residential property, there is less of a tenant pool and high vacancy rates are not uncommon.
While a greater return is always attractive, it is imperative you understand the risks.
For these reasons, I do not see it as a great tool / asset to begin building your property portfolio.
It is so important to get the timing right when investing in commercial proeprty.
Too early and you are taking on more risk than you need too initially and receiving far less capital appreciation.
This will slow you down significantly when you take into consideration the effects of compounding over a decade or more.
The ideal time to take advantage of Commercial Property would be part of an exit strategy or when you slow down or are heading toward retirement.
Maybe offload a higher growth asset and transition more into cashflow.
With a much wider asset base and more wealth, you will be better placed to take on the higher risk and volatility also.
Commercial property can be the icing on the cake, but to bake the cake it may be more prudent to focus on Residential property.
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