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The main differences between commercial and residential property investments

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The main differences between commercial and residential property investments

by Sam O Connor 13 November 2020 1 minute read

Before you look into commercial property investment, it’s important to recognise that there are considerable differences between commercial and industrial properties compared with residential real estate.

The main differences between commercial and residential property investments
November 13, 2020
>The most common ones can be summarised as follows:

  1. Commercial properties tend to yield a higher return than residential properties. That’s because professional investors require a higher rental return from their commercial properties to make up for the relatively weaker capital growth, the longer vacancy factors and potentially higher risks.  
  2. Leases for commercial properties tend to be for longer periods, often three to 10 years as opposed to the six or 12-month lease, which is common in residential properties.
  3. Rents are usually charged as a rate per square meter and rent reviews are incorporated in the lease document. Rent reviews may be calculated every year or 18 months for example and can be an increase to market rental or an increase by the increase in the amount of the CPI. Some leases have a clause preventing the rent to drop even if the prevailing market rent drops.
  4. Tenants in commercial properties usually pay all the outgoings such as rates, taxes and insurance, while with residential property the landlord pays these.
  5. Because your tenant conducts their business from your commercial property, they tend to look after it better than residential tenants do, usually maintaining and painting the property.
  6. Commercial properties are less management-intensive – tenants don’t tend to bother you for small items like leaking taps.
  7. Lenders will usually lend less for commercial or industrial properties. This means the investor needs to come up with more equity to purchase commercial.
  8. The initial capital required to get in to a good commercial property is usually considerably higher than that required for residential properties, as a good shop or office in a strong centre may cost two or three times the price of a unit or apartment.
  9. Interest rates for a loan on commercial properties are usually higher than for residential properties.
  10. When vacancies occur in commercial properties, they are often vacant for considerably longer periods than the week or two you may have a residential property vacant. 
  11. The cycle for commercial properties is different to that for residential properties and is even more dependant on the general economic factors than the residential market. COVID, for example, has made a lot of retail stores less desirable as online shopping takes off.
  12. The lease required on a commercial property is much more complex and usually requires a solicitor to prepare it. Also court disputes over the lease are more costly and less clear.
  13. It’s easier for you to pick a top-performing residential investment. Most beginning investors know what to look for in a residential property – they have lived in a house, but few would know what a tenant looks for in a good commercial or industrial property unless they have conducted their own business from one.
The main differences between commercial and residential property investments
The main differences between commercial and residential property investments
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Sam O Connor

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