If you’re new to investing, you may have heard commercial property can provide solid returns. But what exactly is a good return on a commercial property? And how do returns compare to other popular investments?
Commercial property investment is popular for those who want solid cash flow. And that’s typically what commercial real estate provides: strong, long-term income. But what is a good return on a commercial property?
Many investors will have different criteria for what a good return is on a commercial property:
- Yields must be higher than residential property investment
- Returns must be greater than the cost to finance the property
- The property provides an income to live off
- The return outweighs the risk of investing
Everyone is different. But the first thought in most investors heads when assessing a commercial property investment opportunity is yield.
For commercial property investors, yields are typically much higher than residential property. Yields from commercial property can be anywhere from 5% to 10%. Meanwhile, residential property is known for yields between about 1% and 3%.
The main reason for the difference is found in the lease agreement.
Residential tenancies run for one or two years and rental payments are usually less than the amount owed to the bank. Meanwhile, commercial properties are occupied by businesses making money from the premises. Lease agreements run for multiple years (sometimes as many as 10 years) and rental payments from tenants are usually much higher than mortgage repayments owed to a bank.
