Should you be considering a commercial investment rather than residential when buying property? Photo / Supplied
The default setting for investing in the property market usually involves a residential rental property.
This normally means having someone pay a weekly rental to live in a home that you own – an approach used by many New Zealanders to pay off the mortgage on a second home.
However, there is an alternative that isn’t used quite as often and this involves purchasing a property that’s used for commercial purposes.
Speaking to Paula Bennett on her Ask Me Anything podcast, Bayleys head of insights, data and consulting, Chris Farhi says investors are often more likely to go the residential route because this process is far more familiar to them.
“There are pros and cons for both commercial and residential investment.
“With residential, there are always going to be tenants in New Zealand because the rental market is so strong.
“However, with commercial property you’re typically dealing with lower-maintenance tenants. You typically have a lot of service providers in place to deal with things like light bulb fails or those sorts of issues. Also, because you’re dealing with a business, you don’t have some of the issues that you might have with people living there.”
This isn’t to say that commercial property investment is always a good idea.
Farhi says prospective investors need to take a number of factors into account before signing on the dotted line of a commercial property deal.
“If you’re dealing with retail, as an example, you have to be quite selective about the location and style of building that you’re dealing with because an extremely well-located retail property will probably always be able to get tenants.”
Factors like the availability of parking, the presence of other tenants on the block and the quality of the business occupying the property should all be taken into consideration when it comes to a commercial property deal.
“If you get a good retail property, you’ve got a stronger chance it will be consistently occupied,” Farhi says.
“[You need to avoid] those ghost areas, where in some townships where maybe over time traffic patterns or the pattern for the major anchor tenants have moved away. This can create a higher risk of hitting vacancies, which can become a problem if you need money to pay the mortgage.”
Farhi adds there is a need to be conscious of the quality of the tenant occupying the space in a commercial property as well as the length of their lease.
“When you get into the commercial space, it is much more negotiated. There are very few safety nets – and so, if you’re looking to pick up an investment, you need to be a bit smarter about the tenant and the lease contract that they’ve got.”
This includes the length of the lease, the conditions applicable and also whether there’s provision to allow for the rent to be increased in line with inflation.
“Generally a longer term will be better. And you also want to consider the quality of the business in terms of its brand and performance.”
Farhi says that well-established brands with a long track record of commercial success generally make better tenants because there is a lower risk that they’ll fall over, necessitating the need to find another tenant.
Whether investors decide to go residential or commercial, Farhi’s recommendation is that due diligence is always key.
Listen to the full Ask Me Anything podcast for an in-depth discussion on the ins and outs of the property business.
• Ask Me Anything is a NZ Herald podcast, hosted by Paula Bennett. New episodes are out every Sunday.