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Commercial vs Residential Property Investing

May 24, 2024

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Key Highlights

UK
  • A brief look at commercial vs residential property investment and which one is better for you and your business goals.

 

While property investment might seem like a straightforward investment, there are many routes a potential investor can go down – and not every route may be best for their business goals. In this article, we’ll look at what commercial and residential property is and the pros and cons of both.

The notable differences between both types are usually occupancy rates, maintenance costs, income, and expenses. Commercial properties tend to have longer rental contracts and fewer and shorter instances of void periods. However, getting into commercial property requires more funding and expertise. It also comes with more expenses such as taxes, insurance, and maintenance, which can run costly.

Residential property investment, on the other hand, requires more management on behalf of the investor and can have more frequent void periods where the property is not being tenanted. However, it is easier to get started with a residential investment, costs far less, has lower overhead costs, and can appreciate in value steadily. It also requires less expertise than commercial.

What Is Commercial Property Investment?

Commercial property investment is a form of investment where an individual purchases real estate with the intent of renting it out for commercial (i.e., business purposes). For private investors, direct investment in these properties would mean buying an entire building or buying a share of the property, though this is not necessarily practical for everyone trying to step into commercial property investment.

Commercial property investment can be highly lucrative, as there are several ways to make cash in both the short and long term. This includes rental income from renting out the property to tenants and through capital appreciation, as the building will increase in value over time and lead to profits upon selling. What makes commercial property different from residential is that there are other ways to make cash, including fees for any additional services, parking, advertising, and so on.

When it comes to commercial property, what you go for is dependent on your business model and what type of property you’re looking to rent out. Types of commercial properties include: 

  • Office buildings, including standalone offices, office blocks, and co-working spaces
  • Retail properties, such as shops, shopping centres, and so on. 
  • Industrial properties, such as warehouses, manufacturing facilities, and distribution centres
  • Multi-family Unit Properties, which refers to entire flat blocks that generate income from multiple tenancies
  • Specialised Properties, which refers to any building that has a specific function, such as hotels, hospitals, clinics, schools, and more

When investing in commercial property, you need to decide what the purpose of your investment will be before choosing a location. If you’re looking to rent out office space, then you need to look to cities or industrial estates that are easily accessible. Your chosen location should be already close to other businesses and transport links.

Other things to consider before choosing commercial investment are market conditions, such as economic factors and trends in the commercial real estate market, and your chosen area of interest. Market trends should also factor into the tenants you choose; you want tenants that have a good reputation and financial stability. If your tenants are currently working in a volatile industry that is prone to periods of economic uncertainty, it might not be best to rent out to those tenants.

Commercial Property Investment: The Pros and Cons

Pros

  • Strong Rental Income: Generally, the average monthly rent for a commercial property is much higher than residential, generating more passive income for the investor.
  • Diversification: Adding commercial property to your portfolio is good for diversifying your portfolio and reducing risk.
  • Additional Income: Investors can increase their monthly income by offering other services, charging for parking, and charging for advertising for clients and tenants.
  • Tenancies: Commercial property leases tend to be much longer than residential, ensuring that the property will be used consistently for a good few years.
  • Appreciation: Like with most property investments, commercial buildings can appreciate in value over time.
  • Tenant Quality: Commercial tenants tend to be more courteous and good tenants, as they have a brand and image to maintain.

Cons

No investment is without its downsides. Here are some things to consider before investing in commercial property: 

  • Cost: It costs far more to invest in commercial property outright than it is in residential, where more loans are available.
  • Void Periods: Void periods where the building is not being used or occupied are more expensive than if it was a void period for a residential property.
  • Selling: It can be slightly harder than trying to sell a residential property, especially if your property is specialised, like a hospital or hotel. It can be difficult to find companies or other investors looking to use your property for the same or similar needs.
  • Property Management: Management of the property takes more time, consideration, and effort than it would with residential. Security, maintenance, and repairs all need to be considered and taken care of.
  • Maintenance: As mentioned, maintenance is a huge thing to consider with commercial property. Maintenance is often needed frequently and can incur much higher costs.
  • Market Fluctuations: Changes in economic conditions can impact property values and rental demand.
  • Regulatory Issues: Regulations and laws are far more complex than residential buildings and need to be adhered to at all times.

Residential Property Investment

Like it says on the tin, residential property investment is a form of investment where investors purchase residences to rent out to tenants (or sell or renovate them) to generate income, either through capital appreciation or through monthly income via rental yields. It is generally considered the more “accessible” type of investment when it comes to either residential or commercial property. More people are more likely and more able to purchase a flat or house to rent out than they are a hotel, shop, or office block.

Residential Property Investment: The Pros and Cons

Investing in residential property can be an attractive option for many investors due to its potential for steady rental income and long-term appreciation. However, it also comes with its own set of advantages and disadvantages. Here are some of the pros and cons of residential property investment:

Pros

  • Consistent Rental Income: Investors can enjoy monthly rental income that is consistent. It is often more predictable than other forms of investment, such as stocks.
  • Appreciation: Property tends to appreciate in time, leaving investors with a profit when they sell the property further down the line.
  • High Demand: Rental demand in the UK remains at an all-time high, ensuring that investors are not in short supply of potential tenants. This is especially acute in urban areas and desirable neighbourhoods.
  • Straightforward And Easy Management: Unlike commercial property, management of residential real estate is straightforward to understand and do. Residential leases are often shorter, but they’re simpler. There are fewer issues to worry about associated with commercial property, such as security and regulations.
  • Financing Options: It is often far easier to get funding and loans for residential property than commercial property, making it more accessible for most investors.
  • Maintenance: Maintenance is often much cheaper than commercial property and can sometimes be done without the need of a professional.
  • Portfolio Diversification: Adding residential properties to an investment portfolio can provide diversification, reducing overall risk.

Cons

  • Property Management: Managing a property still takes time and some expertise, it requires a learning curve. Landlords need to be able to deal with management issues effectively and manage their tenants.
  • Void Periods: Residential properties are more likely to have void periods, though not always often. Void periods can result in lost rental income.
  • Market Fluctuations: A residence’s value is still prone to being affected by market conditions and economic uncertainty.
  • Regulatory Issues: Landlords must comply with UK regulations and be aware of the law.
  • Tenant Issues: Landlords need to be prepared to deal with difficult tenants, such as destructive tenants and those who fail to pay rent on time.
  • Illiquidity: Real estate is not a liquid asset and it can take time to sell, especially if the market is struggling. However, it is considered a stable asset as it is still a physical object that cannot be destroyed or disappear.

While it might seem like commercial property has more money to offer, in reality, it is highly complex and has more upfront costs. Tenant turnover may be low, but initial investment is much higher for commercial than residential property. Residential is much more accessible to investors and can be more easily sold further down the line.

Summary

North Property Group is a property investment agency and end-to-end lettings agency which specialises in UK off plan real estate across several cities in the UK. We find the best developments in London, Manchester, Birmingham, and more with first-class property development agencies to hand-deliver premium deals to investors.

Client-focused and data-driven, we’re passionate about what we do and we like to let the results do the talking. Not only can we source the best off-market deals, but we also offer an end-to-end lettings management service, helping you manage your property’s lifecycle. Book a free consultation with us today to start your UK buy to let investment journey and tap into the UK’s premium off plan property opportunities.

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