How to choose the right kind of property for your portfolio

Gary Palmer, CEO of Paragon Lending Solutions takes a look at what to consider when weighing up a new property investment.

Property has always been a solid addition to any investment portfolio, but when looking to grow your assets and investments, it’s worth pausing to consider the pros and cons of residential versus commercial property investments.

Consider your income generator

Investors should consider who their tenants will be, since they will be the ones providing income security. Unless you have a blue-chip tenant in a commercial property there will always be some tenant risk. The risk of defaulting tenants is an unfortunate reality and it’s important to remember that, while it’s fairly easy to shift a non-paying company from commercial properties, the law favours the tenant when it comes to residential defaulters.  In other words, it will be more difficult to get a non-paying residential tenant evicted than a commercial one.

Operating costs can vary

Investors should examine the operating costs of holding and managing a property. If costs such as rates and electricity suddenly increase, know if these costs can be passed on to the tenant. In general, operating costs are lower on residential properties. On the flip side, compliance is higher when it comes to letting out a residential property. For example, if you wish to use an AirBnB model, all body corporate rules will need to be met.

Look at the difference in bank financing

As with any investment, the cost of funding must be considered. In most cases, the repayment terms on residential properties are longer and attract better interest rates than with commercial property, given the Basel III requirements. Commercial property finance also generally attracts a raising fee of between 1 and 1.5%. Since the administration is usually less in residential finance, upfront fees will be lower.

Don’t forget VAT

Investors need to take VAT into account. If you are leasing a commercial property you can charge VAT which the occupying tenant can claim back. This is not the case in residential since the tenant can’t claim back any VAT. If an investor wants to build a portfolio of residential properties there will always be VAT leakage.

Exit strategies first

How to offload property investments needs to be considered before the deal is struck. Investors need to understand how much they will have to spend on a property to get it market-ready and consider their ability to sell quickly and at the right price, should the need arise.

Go where the choice is

An independent financing company can help source the best deals and the best terms. They will give investors an idea of the options as well as how to combine a funding solution which includes short-term, long-term and structured debt.  An independent lending company will also be in a position to mix and match growth finance institutions and products since they have working relationships with the banks (both big and small), the credit funds, the asset managers as well as select private funders – and are not beholden to any of them.