subject: Investment In Residential Property Versus Commercial Property [print this page] Definition Definition
Lets begin with some terminology.
Residential Property- Residential Property draws income from dwelling units. Single family homes, apartments, buildings, etc fall under the category residential property.
Commercial Property- Commercial Property draws income from non residential avenues like retail space, offices and tenants.
Types of Property for Residential and Commercial Investments
Generally houses of 4 units or less is considered as residential property. It derives income in following ways
Buy to Let- You can purchase buy to let investment properties that mean youll get rental yields every month.
Resell- You can purchase property solely for resale purposes.
Commercial Property- Commercial Property derives income from business, like from hotel, restaurants, warehouse, and industrial buildings.
Residential Property is considered as more favorable investment because managing a residential property is much simpler than managing a commercial property. Hence, investors often rely on investment in residential property as a safe haven because you dont need any professional real estate company to support you.
The Pros and Cons
The escalating cost of a property has not been able to dampen the spirit of property lovers. Before buying the property, make sure you understand pros and cons of the same.
Residential Pros
Residential Property is easy to rent. Also, the yield is high, so there are lots of potential tenants.
Leases are generally for stipulated time frame. So, turnover tends to be strong if you invest in multiunit residential property.
It is one of the few financial assets where financing tends to be easier and straightforward.
The cost per unit tends to be lower in residential property in contrast with the commercial one.
It adds beneficial effect on expected returns. Investing in residential property help you to manage risk more effectively by protecting against market cycles or consequential negative events, often known as tail risks.
Moreover, you can keep a watch on your property by residing in the property.
Residential property market does not require extensive knowledge of property market and current conditions, all it requires is a simple research.
Residential Cons
It requires a lot of management.
If you are investing in buy to let option, then if a tenant vacates the home, it equals to 100 percent loss of rent.
If you are planning to rent your multi family house, it tends to be older; hence it requires more maintaince on your part.
Demand for residential property have shown sustained growth but the major disadvantage of letting your property is you can get a call or complaint anytime.
If you have an ancestral house or large multi unit residential property, it requires more repair and maintaince.
Nonetheless, Investing in residential property is regarded as low risk investments. If you plan to invest in commercial property, you need to have an extensive knowledge of real estate market and current economic conditions affecting the globe. You need to value the property accurately and need professional real estate management company to assist you.
Commercial Pros
Leases are for longer duration, say it can be of 5 to 10 years. Except for a small business no reputed company can take risk of becoming an established company in a particular area without any guarantee.
The other advantage is tenant share expenses on pro rata basis, which means tenant is liable to pay a particular amount of expenses and maintaince costs. This makes cash flow more predictable.
Another benefit, it requires less hands on management as compared to residential property. It rarely requires renewal or repair and maintaince on your part. Generally, there is a contract between tenant and landlord that tenant will be responsible for repairs, maintaince, and glass breakage, if any.
They have a high potential of returns. Although they are considered as risky, yet the yield is high. Moreover, businesses are considered as more reliable than private arrangements.
The major disadvantage of investing in commercial property is unable to find commercial tenant.
Commercial Cons
Despite its flexibility, lenders are not willing to finance you unless and until you have relative experience in the same field. The financing option is not easy and straightforward.
Leasing a residential property is much easier as compared to leasing a commercial property because it involves a lot of legal procedures like attorneys of both the sides will try to negotiate and decide on terms and conditions of the lease. The cost involved in the legal procedure is exorbitant.
Extensive knowledge acts as hedge against all the problems. If you are investing in commercial property, you need to understand concepts like tenant mix, and if you are investing in retail space, you need to understand the basic concepts like commercial insurance and reconciliation of expenses, etc.
The process of resale is quite complicated.
Last but not the least, as said earlier it is not easy to find potential commercial clients. Commercial clients usually allow 6 to 12 months to renew the lease. Hence, tenant gets ample time to find a new landlord.
There are many factors that you need to consider before purchasing any investment but remember diversifying your portfolio can offer added protection and income. With the ravages of time, residential property has become a more profitable venture for conservative investors. By considering your objectives and by evaluating your financial resources- you can jumpstart with the most favorable option.
