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Commercial property vs. residential property investing

Most people start out with one or a few residential properties when building their property portfolio. Particularly, rental apartments and houses are a popular choice. Although not always a top contender, commercial properties have so much to offer. One is higher returns. Another is that commercial properties are almost always low maintenance. 

Read on to find out the main differences between commercial real estate and residential real estate. 

Lease terms

When you purchase a commercial property, it could be an office, a warehouse, or a shop in a business district. Usually, these types of spaces get longer lease terms than residential properties. It could be tens of years. Businesses don’t often go location hopping especially if the location is strategic to their business operation. 

At the same time, the other party you will deal with is a business entity and the contract usually contains more elements than a rental agreement. Plus, the conditions in the contract will depend on the nature of the business the renter will execute. This is why you will need the help of a lawyer and a financial advisor when drawing up a lease agreement. 

Whereas with a residential property, the contract is usually on the shorter side in terms of length of stay.

Vacancy rates

When you lose a tenant in a rental apartment, it is relatively easier to get another renter. With commercial properties, the longer lease terms are advantageous. However, it could be difficult to find another renter when your current one moves out.  

Expect longer vacancy periods. This means that you have to be prepared to cover the operating costs of the property while it is vacant. 

Rental Yield

It is much more expensive to rent a commercial space than a residential one. The demand for commercial spaces is different from that for residential properties. Since the property will be used for profit-making, it’s more expensive. 

Typically, you can make double the rental yield of what you can get from residential properties. Especially if the location is in-demand, you are set to get a positive cash flow. Residential properties can produce a rental yield of 1 to 3% per annum while commercial spaces can make you 5-10% in rental income every year.  

rental income in residential vs commercial property

Maintenance and repairs 

With commercial lease terms, the tenant usually covers the taxes, insurance, and repairs needed to keep the property in top shape. Meanwhile, residential property owners shoulder these costs and the tenant only needs to pay the stay. 

However, in the long run, commercial property owners must have readily available capital in case a big renovation is due. Commercial properties often need big renovations or repairs to keep being attractive to tenants. Residential properties can usually make do with a fresh coat of paint.

An incentive for commercial property owners is that tenants are often compelled to maintain the space they rent. If it’s a shop, there is a premium on having a well-maintained space to attract customers. If it’s a warehouse or production plant, the space needs to pass safety and sanitation standards. 

Whereas, with residential properties, getting a great tenant can be a hit or miss. 

Financial requirements

Taking out a commercial loan is much more complicated than a home loan. Lenders also require a higher deposit and charge higher interest rates. Talk to brokers to get the best deal when buying a commercial property. 

Consistency of demand

People always need a roof over their heads so it is understandable that the demand for residential properties is consistent. On the other hand, the demand for commercial spaces is unpredictable. 

Regardless if the market is performing well or not, housing is a basic need. Businesses may close at any time just like what happened when Covid-19 devastated the whole world. 

Given this, it is outright riskier to invest in commercial properties. But just like what they always say, higher risks, higher returns. At the end of the day, it all boils down to preference. You must do deep research to come to a good conclusion. It’s worth exploring both options and drawing the benefits and hazards against your portfolio goals, risk appetite, and knowledge.