Real Estate Investor Magazine South Africa October/ November 2019 | Page 41

P
roperty investment is a huge business model that
quickly becomes lucrative and financially rewarding.
While residential property investment is often pre-
ferred, especially for first-time investors, there are many
benefits to investing in commercial property as well. To
understand which type of investment would suit your port-
folio as an investor, you need to understand the pros and
cons of each.
vacant if tenants have to downgrade owing to economic
constraints. While this is equally possible if you own residential
property, it is less likely as residential rentals are in regular (and
much higher) demand.
Investment period
This is where you look at property that is sold, leased, or used
to achieve a pre-determined business objective. It's used as
an investment to again attain the amount of invested money
back as a means to keep the estate investment business
going. Commercial investing is when buildings are turned into
working office space where a company, two or more purchase
or rent the space for their business objectives. For shorter term investments, residential property is usually
a safe bet because there is consistent demand (especially in
growing metros) for residential and rental properties.
Buying a property in a new plot-and-plan development and
flipping it for profit, or renovating a property in a gentrifying
area and selling it after six months is also an option where
residential property is concerned. With commercial property
however, short-term investments are those held for five years
or less, and it is generally accepted that realising the income
potential from a commercial property is a longer-term
commitment.
Residential investing Investment amount
Commercial investing
Unlike commercial investing, here you are investing either to
accommodate people in the form of rental or you are saving
your retirement, buying property for youself and your family.
Here is a question regularly asked by potential property
investors: “Should I put my money into commercial or
residential property?”
Firstly, both types of property have the big advantage of
being gearable. This means that the investor who already has
a good income stream can usually borrow a high percentage
of the property’s price from a bank. This is property’s main
advantage in relation to other asset classes - the fact that it
can be purchased with borrowed money. From there on, the
differences between residential and commercial property are
fairly wide. Generally, residential property makes the better
choice for the less experienced investor, particularly if you have
limited financial or property experience.
Buying and selling
Residential property, especially in the current South African
market, is easily tradable and/or rentable. Buyers and tenants
are fairly thick on the ground – and, if the property is rented,
tenants are easily replaced. By contrast, industrial, retail or
office space presents the buyer with a more complicated set of
problems. Tenants are likely to be more difficult to find because
tenants will choose commercial property that matches their
particular business needs.
Retail and industrial space in particular tends to require a
specific type of tenant following a specific line of business.
While purchasing any property demands a fair amount of
capital, barriers to entry into the residential property market
are lower than the commercial market. Firstly, banks are far
more likely to grant larger percentage mortgage loans for
the purchase of residential property (up to 100%), while the
associated transfer and ancillary costs are lower. Secondly,
because the value of commercial properties is much higher
than residential property, and because of the nature of letting
commercial property to tenants, the initial costs required for a
commercial property investment are significantly higher.
Running costs
Commercial property investments not only require a large
capital outlay and sufficient capital to meet monthly bond
repayments, but to cover additional expenses. This includes
refurbishing parts of the premises for new clients, covering
the necessary rates and taxes and other expenses, as well
as making provision for upgrades and necessary building
maintenance. While residential properties incur a similar set
of costs, these amounts are generally far lower and therefore
more manageable for a first-time investor.
Making the decision between investing
in residential or commercial property
requires careful consideration and a
clear idea of your investment goals and
investment capacity.
Return on investment The bottom line
The economic climate should also be considered when
choosing to invest in commercial property. There is a risk of
having to offer lower rental rates or risk your premises standing SOURCE Rawson Property
In contrast to residential property, commercial property will
generally give a better return (a Capex rate of ± 11% in South
Africa at the moment compared to residential property where
the initial returns are likely to be between 5 and 8%). But, again,
residential property is far easier to trade if your investment
doesn’t fare well, whereas commercial property is more
expensive and more difficult to shift.
Making the decision between investing in residential or
commercial property requires careful consideration and a
clear idea of your investment goals and investment capacity.
Generally speaking, for the new or first-time investor it is wiser
to begin with residential property and graduate to commercial
once having gained some experience. The risks and rewards
of either property type can be great, but the fact remains that
there is no better investment for the man-in-the-street than
property.
SA Real Estate Investor Magazine OCTOBER/NOVEMBER 2019
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