Residential OR Commercial?

Which property purchase will give me the best financial return on my investment?

Comparisons between these property types over the years have largely been performed without factual foundation.  Using real data and applying discounted cash flow analysis to calculate the internal rate of return which delivers a tangible metric these two property types can be evenly compared.

The properties compared are:

 

1.  A 2 bedroom Strata Flat in Port Melbourne

2.  An Office/Warehouse of 277m² in Port Melbourne

 

The data has been compiled from 2006 to March 2014.

Property Type	2006 Purchase Price $	2006 Income at time of purchase $	2014 Sale Price $	2014 Income at time of sale $
Flat	340,000	13,000	490,000	16,120
Office/Warehouse	590,000	38,000	690,000	45,000

 

Assumptions:

• The flat has experienced no vacancy and arguably could earn more rent per week;
• Flat income is a gross annual rent – landlord pays water rates, council rates and owners corporation charges;
• All costs save for Land Tax, are paid by Lessee of office/warehouse;
• When the office/warehouse is re-let circa 2010, an allowance of 4 months vacancy plus 3 months’ rent free is factored in, and subsequently circa 2013 a further 3 months’ rent free is provided to the Lessee.
• No loan repayments, purchase or sale costs have been factored in.  Nor have any capital improvements been undertaken to either property. 

The Result:
The annualised internal rate of return on equity over the investments life, is:
 
1.       Flat – 8.71%;
2.       Office/Warehouse – 9.14%.

Conclusion:

Acknowledging there are a host of items which can “financially engineer” a “potentially” more attractive outcome, if property is purchased observing the basic fundamentals property provides stable and reliable returns.  Noting the above internal rates of return have been achieved throughout the GFC and its aftermath.

Whilst I have undertaken this comparison between only two property types, it is not conclusive as there are numerous other property types where vacancy periods may be non-existent yet the initial yield on purchase is lower, or alternatively certain property types can experience prolonged vacancy yet are high yielding on initial purchase.

However the ultimate reason to invest should be predicated on understanding what you are investing in, which will provide you with a greater degree of comfort and certainty – ultimately a decision you alone should make with some practical reasoned advice from a known and trusted advisor; being fully cognizant of what you can comfortably manage.

Simon Regan
Director - Sales & Leasing