Residential v.s. Commercial Property Investment: Which Is More Suitable For You?

There are pros and cons to buying either residential or commercial properties. Some examples of commercial properties include office blocks, retail spaces, and shophouses. Now, let’s look at the benefits and drawbacks when buying commercial properties compared to residential properties.

Pros of Commercial Property Investing

1. Rental yields for commercial property are higher

Firstly, in Singapore, the rental yield of commercial properties is usually higher compared to residential properties. The rental yield of commercial properties is 5% on average and the rental yield for residential properties is 2% to 3%.

2. Tax rates

Commercial and industrial properties are taxed at a flat rate of 10% of the annual value. 

To calculate the Property Tax Payable for commercial property:

Tax Rate (10%) x Annual Value = Property Tax Payable

On the other hand, non-Owner-Occupied Residential Properties, the tax rates can range between 10% to 20% depending on the annual value of your property. For more information on the tax rates, please visit the IRAS Website.

3. Additional buyer’s stamp duty (ADBS) for Residential Property

Next, additional buyer’s stamp duty is payable when acquiring residential properties, based on the higher of the consideration or market value. The stamp duty rate depends on the profile of the buyer and the number of residential properties bought. 

4. Selling your Residential or Commercial Properties

For residential properties, Seller Stamp Duty (SSD) is payable on all properties and lands that are bought on or after February 2010 and sold within that holding period.

One huge benefit of commercial properties is that you can sell your property at any time without having to pay fees like SSD. How great, you can now invest those sums of money in better areas.

5. Demand for commercial property rental

Let’s apply some simple economics concept here.

We can see many new condominium and residential properties being built, an increase in supply for residential properties! But, what about commercial properties? The supply of commercial properties is rather stagnant. Consequently, with a lower supply, commercial property investors can rent out their property much easier and at a higher price.

Cons of Commercial Property Investing

1. Central Provident Fund

To purchase private residential properties for own use or investment, you can use your CPF Ordinary Account (OA) savings.

4 ways you can use your CPF to pay for your private property: (source:https://www.cpf.gov.sg/Members/Schemes/schemes/housing/private-properties-scheme)

1.    Pay the purchase price

2.    Repay the housing loan in part or full and/or pay for the monthly housing loan installments taken

3.    Repay the construction loan in part or full and/or to pay for the monthly construction loan installments taken to buy land and/or to construct a house on that land

4.    Pay the stamp duty, legal costs, survey fees and other related costs incurred in the private property purchase, refinancing and/or construction of the house.

“CPF is meant for your retirement needs.”

Therefore, the more you use for your property, you will have fewer funds in your CPF for your retirement needs.

However, the drawback of commercial property investing is that you cannot tap on your CPF, unlike residential property.

2. Volatility

The performance of the industry affects the prices of commercial properties. So if a certain industry is booming, there will be more tenants who will be interested in renting the space. Resulting in both rental and property prices to increase.

For instance, rental of brick and mortar stores in shopping centers may not be as profitable anymore with the rise of the E-commerce industry.

3. Goods and Services Tax

It requires commercial property owners to pay 7% GST, which is not subjected to residential property owners.

4. Down Payment for Commercial Property

As a result of the higher volatility of commercial properties, banks will need a higher down payment for commercial property loans.

That’s all for today! Meanwhile, stay tuned for articles so that you will be updated on the latest financial advisory strategies. Alternatively, contact our Growth Consultants to find out more about our upcoming masterclasses and programmes.

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