Capital growth? Regular cash flow? Both? If you’re thinking of investing in commercial real estate, but don’t know which investment type you’re best suited for, this is the guide for you.
Commercial property investment is an attractive asset class that offers a myriad of opportunities for investors with varying risk appetites and financial objectives. It’s easy to say, ‘I want to make money’ when deciding whether commercial property is the investment for you. But how do you plan for the investment to make you money? Capital appreciation? Or ongoing, steady cash flow?
That’s why, at its core, commercial property investment can be segmented into three primary types:
- Capital growth
- Income yield
While it mightn’t be difficult to discern the returns that investment type offers (i.e. cash flow or capital growth)… but how do you know which is for you?
Let’s delve deeper into each of these to understand their benefits and the kind of investors they are most suitable for.
Author’s note: This is merely a blog post providing general information, and should not substitute for the advice of your financial planner. Always seek professional advice before entering into any major investment – because they all come with risk.
1. Capital Growth Investment
Definition: This type of investment strategy primarily focuses on properties that have the potential for significant appreciation over time. The objective is to buy a property at a good price and sell it at a much higher price in the future.
- Long-term gains: Capital growth investments can provide substantial long-term financial gains, especially in burgeoning markets or areas slated for future development.
- Wealth accumulation: This strategy can significantly add to an investor’s net worth over time.
- Tax Benefits: Depending on the jurisdiction, the profit from the sale of a property might be taxed at a lower rate if held for a certain number of years. For example, capital gains tax on Australian investment properties are typically discounted by 50 per cent when held for more than 12 months.
Best Suited For: Investors who are not in immediate need of cash flow and can wait for the right time to sell. Those who have a longer investment horizon and a higher risk appetite would find this approach most appealing.
2. Income Yield Investment
Definition: This strategy emphasises consistent and ongoing rental income. Investors look for occupied properties with stable tenants and secure rental yields. The primary goal is to derive a steady cash flow from the property rather than its capital appreciation.
- Steady cash flow: Such investments can provide a consistent source of income, which can be especially attractive for retirees or those seeking regular returns.
- Risk diversification: Income-generating property investments can act as a hedge against more volatile investments in an investor’s portfolio (like shares).
- Occupancy levels: Well-located properties often enjoy high occupancy rates, ensuring that the income remains consistent.
- Income certainty: Commercial real estate has the large benefit of ironclad lease agreements. These contracts give an investor income certainty for a certain period of time (usually a number of years).
Best Suited For: Investors who prioritise regular income over potential future appreciation. It’s typically ideal for those who are more risk-averse or are looking to supplement their primary income.
3. Balanced Investment
Definition: As the name suggests, this strategy aims to strike a balance between capital growth and income yield. Investors search for properties that not only promise a reasonable appreciation in value over time but also generate an attractive rental income in the interim.
- Versatility: Balanced investments offer both short-term income and long-term growth, catering to both immediate and future financial needs.
- Risk mitigation: The dual focus can offset potential losses. If the property doesn’t appreciate as expected, rental income can compensate, and vice versa.
- Portfolio diversification: A balanced approach can act as a cushion against market fluctuations, adding stability to an investment portfolio.
Best Suited For: Investors who want the best of both worlds. It’s popular for those with a medium risk appetite and an intermediate investment horizon.
The world of commercial property investment in Australia is vast and diverse, offering something for every type of investor. Whether you’re aiming for long-term growth, consistent income or a blend of both, there’s a strategy that aligns with your goals.
As with any investment, it’s crucial to do thorough research, seek expert advice and always consider your personal financial circumstances and risk tolerance before diving in.
We can’t advise you on your personal investment strategy. But we can help navigate the complexities of commercial property investment.
We invest in commercial real estate all over Australia, offering a variety of income-focused, capital gain-focused and blended opportunities. For more info on our commercial real estate investment syndicates, book a 30-minute, no-obligation call with our director Guy Doggett today.
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Properties & Pathways is a dynamic Australian property investment company. Our completed syndicates have provided investors an average annualised return of 21.97%. For more information on how you can invest alongside us, get in touch today.