The differences between residential and commercial lettings
What are the differences between residential and commercial properties? Should you invest exclusively in only one type or have a mix of both in your investment portfolio?
Although the principles of investing are the same, you should be aware of these two major categories of property as each has its own pros and cons.
The major factors that determine the differences between residential and commercial real estate are:
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Cash Flow
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Rentals
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Tenants
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Property value
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Lease documents
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Financing
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Knowledge of investor
Based on the factors above, let's look at why residential and commercial properties are different, and which might be the right decision for you.
Residential
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Residential tenants are available regardless of the economic condition. This is because most people want to live and rent in places close to their friends, families, job location, educational institutions, etc.
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Investing in rental homes also guarantees available cash flow and easier to rent. Even if a tenant leaves, there are always new tenants coming in. Furthermore, it is easy to sell houses than commercial lots because demand from buyers is always there.
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House rentals are determined by comparable market rates of similar houses in the area. Tenants pay their rents on a weekly or monthly basis. The value of a residential property is calculated by comparing the market price of similar properties in that location. An appraiser is responsible for estimating the value of a house.
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It is possible to buy a residential property with a small down payment and getting 90% or more mortgage financing from the bank.
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The rental lease is fairly standard, short and easy to understand. Landlords and tenants should not have difficulty in understanding these documents.
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Residential and commercial properties tend to have different lease periods. The length of the lease for residential is short (1 to 2 years) and tenants can extend their stay or leave when the lease expires.
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The problem with some residential tenants is that they don’t pay their rents on time, and some won’t even leave when they are asked to. This makes the eviction process a little difficult for residential properties.
Commercial
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Commercial properties tend to be more lucrative than residential because of steady returns and better cash flow.
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Tenants in commercial properties usually pay expenses such as repairs and maintenance as they want their businesses to make a good impression on visitors.
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The lease period is longer than residential, which translates into guaranteed long-term cash flow. Landlords can lease to a tenant for a specific length of time (e.g. 5 years) and then have the option exercised by the tenant to renew the lease for another period of 5 years.
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Most banks are willing to loan more for the housing market (around 75% or more) but less on commercial market (60% or less), so you need more money at hand to make the investment.
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Commercial leases are also powerful when it comes to rent payments. Unpaid rents can result in rent penalty and consequently eviction.
Overall, both residential and commercial properties tend to have their own strengths and weaknesses. In general, most investors started investing in residential before stepping into the commercial arena.
Even though there are differences between the two, you should decide which is best for your current situation, experience, and personal goals, and then find an expert to advise you in setting it all up.