Do you have an extra amount of capital to invest but don’t know where to put it ? Here are a few factors to take into account when deciding whether to invest in a commercial property or in a residential one.
How much capital can you afford to invest? Even though a cheap commercial property investment can be sought, such as a car park or a small office, the vast majority can go for millions of pounds, thus escaping the possibilities of many, unless, investors decide to become part of an investment collective group. To put things easy, with this option investors receive yearly return percentage on their commercial property investment. If on the other hand you don’t dispose of large amounts of capital and aren’t too keen on investing as part of a collective, a residential investment may be the better option for you.
Return on Investment and leasing contracts
This is undoubtedly the most important point investors have in mind when considering any type of investment. In our case, while both types of investment will offer an appealing return, a commercial property investment will offer a much more attractive one. A commercial property investment may yield three to four times the return when compared to residential investments, although there are some rare cases where residential investments offer exceptionally high returns, commercial investments generally offer greater returns. However it is important to note that commercial investments often have higher capital entry requirements and therefore can involve more risk.
Another factor to keep in mind is the hassle of dealing with tenants coming and going. While a residential tenant may lease anywhere from three months to a year, commercial property tenants can run anywhere from a year to ten years, giving you a much longer and steadier rental income without the worries of having to find new tenants on a regular basis.
It is also important to keep in mind that while yield rates on a commercial property investment may be much higher than those on a residential one, residential properties have a less probable chance of becoming vacant for large periods of time. Local economic factors must be taken into consideration when choosing between these two types of investments. When the economy is slow, fewer businesses are opened and thus less commercial spaces needed. On the other hand, residential lettings aren’t influenced as much the economic factors, as there are always more people looking to rent homes as opposed to buying.
Maintenance Costs and Dealing with Issues
When looking to invest in a commercial property investment or a residential one, maintenance costs are also important to keep in mind. These costs for commercial properties and residential properties largely vary, being much more expensive for commercial than for residential. The good news? The good news for a commercial property investment is that the costs for these are usually covered by the tenants, as opposed to the residential investment maintenance costs which are covered by the landlord. However, in residential properties these costs can sometimes imbibe close to 30% of rental incomes. The downside for a commercial property investment is that if you own a commercial building with several tenants, the Common Area Maintenance costs (CAM) run on you. And in most of these cases professional and licensed help must be contracted and can run these costs up anywhere from 5% to 10% of your rental income.
When it comes to resolving tenant issues, residential tenants tend to believe you are on call for 24 hours, and most of the time you’ll have to be in order to resolve any type of issues and keep your tenants from leaving. Commercial tenants are running a business on your commercial property, which means they work during business hours and probably won’t be calling you in the middle of the night because their heater isn’t working or because they’ve been locked out.
Residential and Commercial Property Investment points
Whether you prefer the minor investment, lower return and lower risk of a residential property investment , or the higher investment, higher return and higher risk of a commercial property investment, there are key points that must be analysed before jumping into the venture.
When looking to make either a commercial property investment or a residential one, location is a major point to look at. Location is the major influence not only towards the rental income you can perceive, but can also make the difference between leasing and not leasing. Locations with a high demand for rent can translate to higher rentals. In the case of a residential investment, keep in mind nearby facilities that may influence your ability to rent such as noisy areas like schools or shopping centres.
In the case of a commercial property investment, keep in mind changing infrastructures which may attract tenants to your commercial space if you are near them, or drive tenants away if you are further away from such changes. Also keep an eye out for the possibilities of newer more modernised commercial properties flourishing near you, as tenants will more than likely be attracted by newer premises.
All in all, whether you decide to make a commercial property investment or a residential investment, both offer interesting returns, and it’s just a matter of deciding how much you are willing to invest, the risk you are willing to take and the hassle from tenants you are willing to deal with.