You may be torn between buying a residential or a commercial property. Well, with all the pros and cons laid out in front of you here, the decision should be that bit easier…

Property investments are some of the most popular ways to make a return on the money you put in. Whether it’s rent from tenants living in a residential property, or monthly fees from a business working out of a commercial property, the returns usually come in thick and fast.

Although any residential or commercial property lawyers will help you to get the ball rolling once you’ve made the decision, you must first make your choice: residential or commercial? There are many benefits to both of these property investments, but it ultimately depends on what you’re looking for.

In this post, we’ll cover the major differences between residential and commercial property. We’ll also give you some pros and cons to help you weigh up your decision, and tell you why now is the best time to invest in property. So, for all this, don’t go anywhere…

Differences Between Residential and Commercial Property

The main difference between residential and commercial property are the customers. Residential properties are for ‘tenants’ who live there, and commercial properties are for business owners and companies who run their operations out of them.

The primary investment method for residential property is through the buy-to-let scheme. Investors purchase a property, renovate it, and let it out to renters for a monthly fee. You can either manage this yourself or pay for the property to be cared for by an agent.

Commercial properties can be managed by a professional management company, and are built to meet the needs of economic growth and demand. The three main types are industrial, retail and offices.

You can invest in commercial property by either buying the whole thing outright, or buying shares in it. There are also direct commercial property funds, which invest directly into a portfolio of commercial properties for you, and indirect property funds, which invest in the shares of property companies listed on the stock market.

The two principal ways to earn money from residential and commercial property are:

• Income from your tenants
• Capital growth from an increase in the value of the property

So, those are the main differences between the two types of property investments. It’s now time to help you decide which will give you the best return on your investment.

Pros and Cons of Residential and Commercial Property

On the surface, it seems like residential property is the easier investment option. You buy a house, you renovate it, you let it out to tenants, and they pay you monthly rent. However, it’s definitely not that simple and, after reading this list, you might decide it’s better to invest in commercial property. Some of the main elements to bear in mind include:

Cost of the Property

The purchase cost of a residential property is definitely less than most commercial properties. This makes it more difficult to invest in commercial property in the first place if you don’t have the capital to cover the purchase. Try this mortgage calculator to establish the cost of your capital & interest payment to get your mortgage balance and average monthly repayments cost.

However, with commercial property investments, you don’t have to buy the whole property. As we mentioned in the previous section, you can use commercial property funds to acquire shares in the market without spending too much capital up front.

Income Potential

The most important advantage of commercial property is its return on investment (ROI). Because your customers are business owners or companies, they have much more money than families and individuals.

On average, commercial properties have an ROI of between 6 and 12 percent, depending on its location and the type of property it is. This compares to single family homes with an ROI of 4 to 10 percent. This is quite a difference so, if you can afford to invest in commercial property, it’s definitely the better option if you’re looking for a big return.

Length of Lease

Typically, in residential leasing, the contracts last one year. If your tenants are happy, they can keep on renting, but there’s always the chance of an interrupted income flow. Commercial tenants, however, tend to sign longer leases of 3 to 5 years, and are less likely to relocate due to the disruption it would cause to their business.

However – we always need a ‘however’ because these things are never simple – longer leases are harder to break. So, if you’re unhappy with your tenant, you need a good reason to get rid of them; you can’t just ride out the lease for a year like you could with a residential property.

Maintenance Costs

Maintenance costs are a blight on the amount of money you spend on a property. Fixing up carpets, walls, doors, leaks, damage to windows and white goods, can really add up and cost you a lot of cash up front.

With residential tenants, it’s difficult to pass the cost of maintenance on to them. This is due to laws around tenancy that protect the tenant over the landlord. The latest research suggests the average amount of money spent by a landlord on maintenance repairs is £3,134 a year per property, which definitely eats into the ROI figure we mentioned earlier. You can get landlord insurance, though, which might help keep the costs down.

For commercial property there is a type of lease called a Triple Net Lease, where the tenant pays both the base rent, and an additional rent to reimburse the landlord for the costs of property tax, building insurance and maintenance costs. The existence of this type of lease in the commercial sector, and its absence in the residential sector, makes it a lot cheaper to maintain the property if you can sign one with your tenant.

However, in the absence of one of these contracts, the maintenance costs would be more complex in a commercial property and cost more money than simple wear and tear. In some cases, you might need to hire an on-site property manager, so it all depends on the contract you sign with your tenant.

Property Location

The location of any property is important. You want your residential property to be near important amenities such as supermarkets, shopping centres, transport, etc. and you want your commercial property to be in a desirable business location.

Unfortunately, for you commercial buyers, location is a more important factor in the value of a commercial property than a residential one. In a prime location, like the heart of a city or a busy business district, commercial property is a lot more expensive than a similar sized property out in the sticks.

Why is Now the Time to Invest?

The last few years have been a tempestuous time for investing in the UK property market. Brexit negotiations, the COVID-19 pandemic, and other such issues have made it difficult for people to see into the future of property investment. That said, contrary to the beliefs of many, now is actually the best time to invest in property in the UK, and here’s why:

2007 to 2009 Financial Crisis

The financial crisis of 2007 to 2009 dropped the average price of UK property by 18 percent, from £189,193 in December 2007 to £154,452 in March 2009. This might look like a bad time to invest but, in actual fact, the property market recovered quickly. By August 2010, the average property price was back up to £173,417, with a full recovery by mid-2014.

So, if you invested in property in 2009, you’d see a huge increase in the value of the property you purchased just one year earlier.

Brexit

Brexit was another time of uncertainty in UK property prices, with a one percent decrease in the average price recorded in July 2016. This isn’t as dramatic a drop as the 2009 crisis. However, house prices actually increased by 4.5 percent by October 2017, and have continued to grow into 2020, especially in the North West.

COVID-19

Considering how quickly the property market recovered after these periods of uncertainty, now is definitely a good time to invest in the UK property market before the prices bounce back after the COVID-19 outbreak. Many international investors have taken advantage of the decrease in the value of the British Pound against the Dollar already, and are investing in the UK property market. So, what’s stopping you?

As the pound is losing its value, having money tied up in the property market will help you protect the money you have, and build wealth over time. So, if you want to be part of that investment, you should act now.

 

Have You Made Your Decision?

Throughout this article, we’ve tried our best to give you an overall picture of what residential and commercial property investment is, what the pros and cons are of both types, and why investing during a time of uncertainty is the best time.

If you can afford to invest in commercial property, it’s probably the better option if you want a substantial return on investment. If you’d rather have a lease that runs out quickly to avoid being stuck with bad tenants, however, residential is the way to go. That said, it may interrupt your cash flow if you have new tenants in and out of the property every year.

When it comes down to it, it’s important to make the best decision for you. I’m sure there’s enough information here for you to land on a decision, or at least convince you to look into the benefits of property investment further. Thank you for reading, and feel free to leave your thoughts in the comments down below.