Commercial real estate is attractive to investors for several reasons, and it’s normally the high yields on offer in comparison to residential property that are particularly appealing.
However, commercial property comes with an added advantage in that the tenant generally pays many of the outgoing costs. This can be a significant amount of money and can make an investment in commercial property even more attractive for those investors in search of cash flow.
Understanding net vs gross yield
Gross yield is the rental income you receive before taking into account the expenses. Net yield is your income after expenses.
When you purchase a residential property and rent it out as an investment, as the owner, you’re obligated to pay many of the ongoing costs of the property. This can have a significant impact on your rental yield. These costs include things such as the council rates, strata fees, maintenance and repairs, gardening, insurance, property management fees and water costs.
While you have an attractive gross yield of 5%, when you factor in the expenses that you’re paying, your net yield might be only half that. When we look at commercial property and the fact that the tenant is paying many of the outgoing costs, your net yield might be very close to your 5% gross yield. It’s important to note that every commercial tenancy agreement is a little different, and what the tenant is required to pay will be different in most circumstances.
The other advantage of commercial property from a yield perspective is that it is normally far greater than its residential counterpart. It’s not uncommon for commercial yields to be well above 7% or even 10% at times, and with the tenant paying outgoings, this is very appealing. For an investor in search of cash flow, it can be an attractive proposition.
When looking at the high net yields on offer in commercial property, it is also important to factor in periods of vacancy. Generally, when you have a residential property, it’s quick and easy to find a new tenant to take over.
Commercial properties can be harder to find tenants for, as it is businesses that take up the space. With commercial properties, the lease agreements are normally for a lot longer; there are many cases where businesses stay in the same building for decades.