Is commercial property investment a more level playing field after the recent game changers in the residential property investment?

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The government announced in March 2021 that any new residential property investment purchased after 27 March 2021 (except for new builds) will be subject to a 10 years’ bright line test period and the investor’s interest expense will no longer be tax deductible.  The investor’s interest expenses on existing investments will also gradually cease to be tax deductible.  From July 2021, all rental homes will also need to meet the healthy home standards within 90 days of any new or renewed tenancy. 

There are different commentaries about how the new rules will change the playing field of residential property investment and some commentators suggest investors to move their investments into commercial properties.  However, each investor has different criteria for their ideal investment based on their own approach to risks, expectations on yield and capital growth, experience and knowledge.  Let’s have a general overview of some of the main differences between residential and commercial property investment and see which type of investment suits you better:

Residential Property InvestmentCommercial Property Investment
Comparing to commercial property investment:Comparing to residential property investment:
Parties’ rights and obligations greatly governed by the Residential Tenancies Act.Parties’ rights and obligations greatly governed by terms of the lease.
Landlords must comply with the healthy home standards.Landlords often give no warranties on suitability of the premises for the tenant’s purpose of use.
Landlords must pay the outgoings (such as insurance premium, fixed charges in water rates, general maintenance, property manager’s fee, and body corporate levies).Tenants usually pay the outgoings in addition to the rent (although a “gross lease” can have the outgoings covered by the rent).
Interest expense will become fully non-tax deductible in 2025 (except for new builds).Interest expense is tax deductible.
No GST charged or claimed.GST charged on rent and claimed on expense.
Lower yield (return on investment) usually.Higher yield (return on investment) usually.
Usually for shorter tenancy period (mostly a fixed term of six months to one year if not a periodic tenancy).Usually longer fixed lease term (mostly with a two to ten years’ initial term and likely include further terms as rights of renewal exercisable by tenants).
Tenants can terminate without a reason on 28 days’ notice. Landlords only can terminate for a limited range of reasons on 63 days’ or 90 days’ notice (depending on the termination reason).After expiry of the term or renewal term, both tenants and landlords can terminate the lease during the holding over period.
Usually lower vacancy rate (i.e. taking less time to find a new tenant).Potentially higher vacancy rate (sometimes it may take months to find a new tenant).
Rent can only be reviewed every 12 months up to (but not over) market rent.No restrictions on the frequency (but usually two or three yearly) and mode of rent review (market rent and movement of CPI are the usual basis adopted but other mechanism such as a set amount of rent increase can also be adopted).

While the due diligence investigations to be undertaken for purchasing a residential property and a commercial property are similar in nature, there are always different investigations or considerations that you should undertake and take into account depending on the specific property you intend to purchase.  No matter what property you intend to invest in, we strongly recommend that you seek legal advice from your Gaze Burt adviser before signing any document.  Contact us here.

Julia Leung
Julia Leung

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