Kiwis have a love affair with property, and buying a rental property is often a “gateway investment” for many people.

The greater familiarity with residential property (we all live somewhere!) is likely why property investors choose this asset over commercial and industrial property to invest in.

However, recent legislation, compliance, and tax changes have disillusioned many residential property investors.

So, in light of these changes, how does residential property stack up compared to commercial property as an investment?

1. Market Trends

In New Zealand, the residential property market is currently red hot, and house prices have steadily increased over the last few decades.

Commercial property, on the other hand, can be more volatile with greater peaks and troughs.

There is also much more variety in the types of commercial property out there, whether it’s size, purpose or location, which can play a significant part in the property’s value.

2. Cashflow and Capital Gains

With the market as it is, residential properties have made significant capital gains across the board. However, you tend to need a portfolio of properties to generate a substantial rental income, particularly if you have high loan to value ratios (LVR).

This is because, even with low interest rates, mortgage amounts tend to be high – especially for recent purchases.

While there are outliers, commercial and industrial properties haven’t had the same dramatic increases in capital gains as a general rule.

What they do have going for them is they often have higher lease payments and, therefore, better cashflow for the landlord (particularly if you take into account that a lot of costs are paid by the tenant – more on this later).

3. Stability

Compared to residential property, commercial property is often more stable.

Tenants can sign leases that last years, and the lease is to a business rather than a person.

In comparison, residential tenancy agreements tend to be for 12 months and can roll over to monthly periodic tenancies.

This higher turnover of tenants does increase cost and administration.

4. Repairs and Maintenance

Both residential and commercial properties need ongoing repairs and maintenance to look after the building and protect and enhance its value.

The difference between the two is who pays.

With residential, typically, repairs and ongoing maintenance costs fall to the landlord.

Commercial property is the opposite, where these costs can be passed on to the tenant under the lease.

5. Legislation and Compliance

Residential property is subject to the Residential Tenancies Act and the various amendments and additions that have come into law over the last few years.

This includes the Healthy Homes Standards, which has increased compliance for rental properties, and there are significant penalties for not meeting these standards.

Commercial property is a lot more straightforward and is treated as a commercial arrangement between landlords and tenants.

While there isn’t much formal legal compliance, things like having an up to date Building Warrant of Fitness (BWOF) and the right insurance are essential.

6. Barriers to Entry

Residential property is straightforward to get into. What surprises many people is that commercial property is just as easy to purchase.

And, with house prices as high as they are, entry level commercial properties ($300k and up) are well within reach.

7. Passive Investment

Ultimately, you want your property portfolio to be a passive investment. Employing a specialist residential or commercial property manager definitely helps with this.

Even with a property manager, commercial property can be a little more passive due to the longer leases, lower tenant turnover and less legislation.

8. Tax Advantages

The Government’s more recent tax changes (Brightline test and removal of the ability to deduct interest, for example) have impacted residential property as an investment.

On the flip side, the tax advantages of commercial and industrial property have been improved with buildings, fixtures and fittings able to be depreciated – in addition to still being able to deduct interest costs.

A skilled accountant can help you structure your investment to maximise these benefits.

Diversity Is Key

So, is commercial property a better investment than residential property?

The short answer is that it is a vastly different type of investment – as you’ve seen above.

Most astute investors diversify and invest in both (along with other asset classes).

If you’re starting out in property investment or already have a residential property, then commercial and industrial property is well worth a look.

We’ve managed hundreds of commercial and industrial properties, so if you’re interested in investing in a commercial or industrial building – give us a call.

In addition to our own knowledge, we have a vast network of experts we can introduce you to.