Choosing between a commercial or residential investment

When you invest, you can choose between buying a commercial or residential property. But both options come with their own advantages and disadvantages.

When deciding to invest in either commercial or residential real estate the first thing to do is towork out the annual return or yield.

Commercial properties are used for business like retail, office space or industry. Generally, commercial investments involve stricter lending conditions and a larger deposit than residential property.

Advantages

• Tenants are generally responsible for outgoings like rates and insurance.
• Tenants are more likely to make improvements that will increase your property’s value.

Disadvantages

• Commercial properties can sit untenanted for long periods, particularly in uncertain economic times.
• Commercial properties typically have lower capital growth potential because the building (which will depreciate) takes up most of the land.

Here’s a good commercial property scenario:

After doing the maths, Meagan, an IT professional, decided to invest in buying a retail shop on a busy inner-urban shopping strip. Using a leasing specialist, she soon attracted a brand-name tenant who spent Rs 20,00,000 fitting out the space including a mezzanine the owner wanted to use as an office.

Such capital expenditure was a great reassurance to Meagan as, not only did it mean the tenant would want to stick around to recoup their investment, but it also delivered a great capital improvement to her property.

Questions about commercial property

Before you plunge into commercial property ask yourself the following:

• Can you afford to service the debt while the property is untenanted?
• Is it in a growth area surrounded with good infrastructure like transport networks and services?
• Does it attract the sort of tenant who will stick around for the long term?
• Does the building suit the tenants you’re after?

Residential property

Advantages

• Residential property is less likely to stay untenanted for long periods.
• Residential properties have a higher land-to-building ratio than commercial, so usually offer higher capital growth because land values go up, but buildings depreciate.

Disadvantages

• Residential properties typically deliver a lower return because you can’t charge as much rent as commercial properties.
• You’re responsible for maintenance costs. 

Now, it’s a matter of finding the right residential investment property for your needs and budget.