Typically the residential real estate market is houses or apartments with rental agreements for one year or longer where the house is rented out to a single family or group of individuals for them to personally live in.
So can you invest in residential homes but have it be a commercial investment? AT what point does it become commercial and why would you do it?
Like all things commercial it all comes down to cash flow and “the numbers”.
Let me show you what I mean.
Over a period of years, all things seem to move toward an upgrade. More people now are traveling for business than ever before. The world is becoming smaller and with more and more foreign investment in Australia we are seeing more corporate execs flying in, staying for a time and flying out.
Time was when they used to stay in a hotel; now they want more homely accommodation. The serviced apartment market is taking off.
Time was when serviced apartments were tiny bedsits for bachelor’s and divorcees; now they are beginning to look more like resorts with added business facilities.
Developers are selling blocks of 2 or 3 or more of these apartments to investors. Typically these are Mum and Dad investors who know little about effective commercial investing. Personally this kind of deal is not my scene, but, of course, that’s just more down to personal preference.
I’m not saying that these are not worth investing in, but you would want to be pretty sure of your numbers and have some body corporate guarantee of minimum rental yields.
If there is a good marketing plan for the whole complex, then returns can be high and stable over the long term.
Even though leases tend to be short term, rents can be very high which can make up for periods where the property is vacant.
Business analytics firm IBISWorld recently reported the serviced apartments industry has been the strongest performer in the accommodation scene for the past decade. It is set to continue growing at a rate above three per cent a year. Recent estimates of the industry’s revenue indicate a figure of $3 billion a year.
Another variation on this is creating apartments for international students.
I’ve seen a lot of press about this in recent months given that education is Australia’s fourth largest export earner at more than $14 Billion a year.
We host over half a million international students every year, a number that is set to grow to 600k in the next four years.
Currently, returns are around the 6%-7% a year that is better than the residential market is not quite on par with some other commercial opportunities.
While the commercial property market seems to be tightening up a bit at the moment with investors willing to take less return in order to secure a commercial property, there are still commercial properties coming up all the time which are proving 8% or higher after all purchase costs and outgoings.
The good thing about these student accommodation deals is that, like the executive serviced apartments, they can be bought in small blocks and should come with body corp agreements for maintenance and other ongoing management.
This may eat into your returns, but it also makes it a hassle free set and forget type of investment if you are looking to stash your cash somewhere that beats what the banks will give you.
Finally, you have the tourism market to explore which allows for a lot of scope and creativity.
There are the same type of deals where you can buy blocks of 2 or 3 holiday apartments in a resort, but I’m not a fan of that kind of investment at all.
In reality I always prefer to just outright own a property, so buying these little groups of units, or holiday apartments, etc. in a larger complex seems to increase your risk. It means that there are too many factors that are out of your control.
A better solution is to develop the property yourself. I’ve built back-packers accom before and been involved in resorts via a syndicate groups. They can be very lucrative and leave you with more say and more control over how the deal is done.
The same goes for blocks of apartments.
While a block of apartments is considered residential property, over 4 apartments and banks will often make you look at commercial lending and because of a body corporate that a block of apartments must have you can often leave much of the management, maintenance, and upgrades to them.
The great thing about doing this for yourself rather than buying into a larger complex is that you have the possibility to strata-title the units. This allows you to recoup some of your expenses by selling off some of the units and at the same time increasing the overall value of your property.