Commercial vs Residential Property Investing
What are the differences between commercial and residential property investing? Here are some key points to help you distinguish between them both.
1. Longer Leases
As families tend to move more often compared to businesses. Commercial tenants tend to stay longer as they would have most likely made some capital investments to customise their premise according to their business need. It is not uncommon for a commercial tenancy to last as long as 3 to 10 years. The benefits of longer tenancy should be balanced with the understanding that a longer vacancy period may be required in order to locate the right tenant to suit the property.
2. Rates and Variable Outgoings
One of the most attractive benefit of commercial property investing is the benefit of having various outgoings recoverable from the commercial tenant. These Variable Outgoings include Management Fee, council and water rates, land tax and strata levies, insurances etc. With residential properties on the other hand, the Owner will have to bear the full cost.
3. Rent Increases
Rent increases are usually annual and are governed by the lease. The type and amount of rent increases are negotiated prior to the lease being drawn up. The types of rent review in commercial would be usually be based on market, CPI or fixed reviews.
4. Property Upkeep
Since commercial tenants are likely to run their business at the premise, it will be more likely that the property will be well-kept to their own interest.
5. Economic Sensitivity
Overall, because commercial properties are more vulnerable to the economic cycle and conditions, they are considered as a higher risk investment (hence potential higher returns). It is highly advisable that the investor has adequate cash-flow reserves and the ability to fund potentially longer vacancy periods.
6. Knowledge Base
There are more legal complexities involved in commercial property investment as well as a broad-based knowledge on the economic conditions is required to be successful in commercial property investment due to the economic vulnerability of this high yielding asset class.
7. Commercial Leases
In commercial leasing, leases are usually drawn up by solicitors – and in general, the tenants pay for this. Retail tenancies differ and these are governed by the Commercial Tenancy (Retail Shops) Act. Commercial leases are complex legal documents and as such any issues frequently have to be dealt with by a solicitor. For example, rent defaults are issued by a solicitor to ensure they are done in accordance with the lease. Generally, this would mean higher costs for the owner if they cannot recover them from the tenant.
8. Make Good
Most commercial leases have a make good clause. This means that the commercial tenant has to repaint and replace flooring when they vacate. Residential tenants are not obliged by law to do this and in fact, any claims to the damage of a property is considered on the grounds of “fair wear and tear”. Residential tenants are not responsible for fair wear and tear to a property.
In conclusion, it is recommended that you tailor your property investment strategy to suit your needs best based on your unique circumstance. Commercial property investment strategies could be used alongside residential to maximise cash-flow returns and grow your portfolio. However, we would highly advise a careful consideration of your personal financial capabilities and that you ensure that you have enough liquidity before embarking on commercial property investing.
Due to the complexity of commercial property management, most investors would hire a commercial property manager to ensure maximum yield on their investment. If you have further questions, we would be happy to help you in understanding the requirements of commercial property management and walk alongside you on your property journey.