Owning Commercial Property vs Residential: Which is Best?
26th March 2019
Property has always been an extremely popular asset for UK investors. However, with the Investment Association’s (IA) decision to split the property sector into two sectors (Direct Property and Property Other), effective from 1st September 2018; some investors are left questioning whether they should invest in residential or commercial property.
Commercial real estate vs residential real estate
Both have their own benefits and risks, so it’s important that you are 100% clear on the differences between the two, before you make a decision as to which one you’ll invest in.
In this article, we’re going to take a look at the differences between owning commercial property vs residential, so that you have all the information you need to make an informed investment decision.
Commercial vs residential: potential
What causes specific property to be an investment opportunity? It’s based on a variety of factors, and these differ between commercial and residential real estate.
For residential property, the potential of an investment is largely down to the characteristics of your chosen location, including economic growth, locality to good schools or universities, employment rates, average wages, and of course, access to finance. Desirable places to live drive higher prices.
Commercial property carries less emotional factors. Often, it simply comes down to having a secure tenant in an established location; making these investment opportunities down to economic growth and products.
Commercial vs residential: knowledge
Many investors (especially those that have not invested before), will opt for residential, simply due to the familiarity of understanding the steps of purchasing this type of property, as most will already own their own homes.
The most common route for residential property investment is buy-to-let, with many first time investors pulling equity out of their own home, in order to gather together the deposit needed for a buy-to-let investment scheme.
When you compare investment in commercial property vs residential, the commercial sector is less emotive, for the simple reason that it’s professionally managed; and you can work with commercial property agencies like ourselves to ensure the smooth running of your property.
It’s also important to remember that you can’t purchase residential properties via the SIPP route, which is one of the most common vehicles for commercial property investment purchases.
The fact that commercial property can be acquired through professionally managed funds makes the whole system more transparent, which can be easily managed, even on a larger scale.
Be aware that residential property can be a bigger commitment – you’ll have to manage your time and money carefully. Ongoing maintenance, repairs and refurbishments will be taken out of your profit – whereas refurbishment costs in commercial properties are covered by dilapidation settlements.
Residential properties also see a faster turnover of tenants compared to commercial properties, so you’ll need to account for potential short periods of non-rentals, in between one tenant moving out, and another moving in.
Commercial vs residential: costs
People are attracted to residential property investment as they feel it’s more straightforward than commercial property, but investors need to be aware of the time that’s involved with residential property – not to mention potential changes to regulations and policies, and rising costs such as fees and taxes.
Ultimately, it’s much more difficult for investors to secure a residential “project” that will give them a huge return on investment, by renovating and selling the place. Why? Because housing prices have risen so much. House prices have risen by almost 50% in the last ten years, which is much higher compared to the inflation of wages.
Of course, when comparing investment in commercial property vs residential, commercial property comes with its own set of costs to navigate too. You’ll need to speak to commercial property consultants so that you can navigate the purchase, lease, tax and contracts you’ll need to take into consideration, so that you can minimise the risk of investment.
Think of it this way: scaling up can be more effective for commercial properties. However, you need to be extremely careful when it comes to valuations. The price of a small office compared to a similar sized flat is likely to be significantly higher, and remember that prices of two similar offices and warehouses can vary wildly. You’ll need an expert in commercial property valuations to price up your potential new investment for you.
For more information on how you can finance your commercial property investment, head on over to our article about commercial property investment tips.
Investing in property can bring huge rewards, if done correctly. However, there are so many aspects you need to consider, including costs, complications and potential opportunities.
When comparing owning commercial property vs residential, they each bring their own set of risks and rewards. If you want to find out more about owning commercial property, or need help managing your commercial property, get in touch with us today. Alternatively, for the latest news in the property industry, head on over to our blog.