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By Amy Hamilton-Chadwick, Freelance writer and registered FA
THE HOME ADVANTAGE
The accessible option
If you’ve ever been a tenant or owned a home, you already have a basic understanding of what the residential property market involves. You’re providing a place for people to live in.
Learning more about residential property investment is easy, too. Property investor associations can be found all over the country, there are plenty of books in the library and lots of information can be found online.
For the beginner, residential property investment is relatively easy to get your head around, according to Maree Tassell, owner of iFindProperty. She says residential is like learning first aid, compared to commercial being like studying to become a surgeon.
In general, the barriers to becoming a residential landlord are fairly low, and mum-and-dad investors can get into it. People are more aware of what could go wrong, and being homeowners themselves, they tend to understand the risks a bit more, says Paul Chapman, chief financial officer of property-management company Quinovic.
Potentially fantastic capital gains
Stories of incredible gains in the housing market are dinner-party fodder all over New Zealand. This is especially true in Auckland, where people are effectively making a third income from increases in the value of their homes.
It’s often said (and equally often debated) that houses double in value every 10 years – that’s not something you hear about commercial buildings.
Residential property is a great place for investors to cut their teeth and grow their wealth. From there they can move into higher-end investment, such as commercial property, says Tassell.
Lenders love residential
Banks are usually happy to lend on almost any residential property, provided you meet their criteria, and interest rates are low now too.
Easy to tenant, easy to add value
Finding a tenant for your residential rental is straightforward and you wouldn’t expect your property to be empty for more than a few weeks each year. Commercial buildings can sit vacant for months, or even years.
Another advantage to residential property is that you can add value by renovating – from a simple repaint to adding a whole storey. That value gain is independent of the tenant and it could give you the equity you need to buy again.
THE COMMERCIAL EDGE
Commercial property investment is relatively hands-off, making it a more straightforward and less stressful option than a property needing more active management.
Commercial-property leases are an agreement between two businesses. Tenants tend to be professional, look after the building carefully, and take on almost all the operating expenses. If the tenant fails to meet the terms of the lease, you can evict them more easily than a residential occupant.
For an entirely hands-off income, you could join a commercial-property syndicate, which pools money from individual investors to buy property and share the rental income. The syndicate appoints a property manager, so no day-to-day input is needed from investors.
Oyster Group specialises in the creation of commercial-property syndicates, and has recently opened the Oyster Direct Property Fund. Its chief executive Mark Schiele says the advantage of a syndicate is the opportunity it provides investors to be involved with substantial commercial properties they couldn’t afford on their own.
Superior cash flow
The right commercial property will bring cash into your bank account every month, over and above your outgoings. When it comes to positive cash flow, commercial is the overall winner. However, it’s a higher-risk, higher-reward market, and it’s where you find the big money.
Returns improve as you buy more expensive buildings, which is the reverse of the general trend in residential investment. Prime commercial buildings cost more than lower-quality buildings to purchase, but deliver higher returns, according to Chris Dibble, director of research and consulting for real-estate company Colliers International. He also says higher-spec buildings typically require less capital expenditure and ongoing maintenance.
No LVR restrictions
Particularly for Auckland investors, the absence of loan-to-value ratio (LVR) restrictions has been an inducement to start buying commercial property. The LVR is a measure of how much a bank will lend against a residential property, compared to the value of that property.
Great long-term tenants add instant value
Good tenants are key to successfully investing in commercial property. A quality long-term tenant adds massive amounts of value to your property the moment they sign the lease.
The last word: don’t overextend yourself
Your choice of investment property must be based on your personal appetite for risk, says Chapman. Most people would see commercial as higher risk and higher dollars, but it’s “horses for courses” he says. When trying to decide between the two, consider your individual circumstances. And whatever your decision, make sure you have the right financial backing and don’t extend yourself unnecessarily.