Residential VS Commercial Property Investment

Investing in Bricks and Mortar

Despite the uncertain UK and wider global economy, property continues to be an extremely popular sector to invest major capital in and buying into bricks and mortar, be it residential or commercial, can be a hugely financially rewarding investment to make.

It’s important to decide upon the right type of property investment to entrust your capital, that’s likely to see the type of returns you’re envisaging. Conducting research into property prices and the general economic landscape of the area in which you’re considering investing could mean the difference between a prosperous return; marginal profit; or drastic loss on your invested capital.

Residential Properties

Deciding to invest in the residential property market usually means buying a property or properties with the view of Buying-to-Let.

Time Commitment

Depending on how involved and hands-on an investor you are, residential property investment may mean you will need to commit much more time to your investment in comparison to a commercial property investment.

Financial Commitment

One-off costs and ongoing fees and expenditures should be factored in to your decision when considering which type of property investment is a prudent one.

Residential property can be more of an ongoing financial commitment than commercial property with costs in addition to the mortgage/lump sum payment for the property, along with the increased Buy-to-Let/Second Home Stamp Duty. Extra and ongoing expenses can include renovation costs, buildings insurance, property management fees, advertising fees, property maintenance, household purchases and repairs.

Void Periods

Potential residential property investors should also factor in void periods when the property may be unoccupied. The monthly income generated on the property can easily be diluted by such costs so it’s imperative to take these financial extras into account when making your choice.

Tax and Mortgage downfalls

Restrictive mortgage rules and tax and interest heavy duties on property ownership are factors that could put the potential property investor off committing capital to a residential property.

Property Value Drops

One factor investors will need to consider is the risk of investing capital in a property that may fall in value.

Rise in Value

On the other hand, the property may rise in value, perhaps due to renovation works carried out and/or a general national rise in the housing market.

Regular Monthly Return

A-Buy-To-Let residential property when occupied can secure the investor a rewarding regular monthly income, especially if the property is well placed in a high-yield rental marketplace location.

Continuing increased demand from tenants for properties to rent; interest rates rises; and rents that are projected to continue to increase with inflation means the Buy-to-Let investment can be an attractive opportunity for investors, offering a steady and attractive return on their initial investment. If paying a mortgage on the property this monthly income is of paramount importance. If the property has been purchased outright then the monthly return becomes even more of an attractive proposition in investment terms.

Commercial Properties

Investment Routes and Risks

Investing in commercial property is not without risk but with sound business advice to help you make the right commercial property investment, it can prove a very lucrative route to make your capital work hard for you. There are various routes into investing in commercial property.

Direct Investment

Direct investment in large commercial properties won’t suit every investor and is naturally a huge commitment requiring huge capital. Small scale commercial properties may be a less daunting and more accessible prospect, with prices more likely to be in a similar range to a residential property.

Buying a commercial property outright can have huge financial risks coupled with the upside of huge financial rewards. The benefit of a steady rental income on the property, which continues to rise in line with inflation, along with potential capital growth from the value of the property rising are both factors which can make a direct investment in a commercial property a viable and fruitful route for some.

If you’re intending on making a direct investment and purchasing a commercial property outright, once you’ve decided this is the investment route for you, seek expert advice on valuations and purchasing advice in areas such as contracts, lease and tax to minimise the risks and extra costs involved in the commercial property you decide to invest in.

Other Ways to Invest

Unless you’re a large-scale property investor, making a direct investment by buying all or a share of a commercial property, investing in commercial property usually means investing via routes such as investment funds, property investment trusts or property bonds, with housebuilders, developers and property management companies.

Property Bonds

Property Bonds are essentially loans; a legally binding agreement between the property developer and the investor and are often referred to as ‘loan notes’. They are a very straightforward way for investors to gain access to the world of commercial property investment. Property developers secure finance from investors to buy land and/or to finance the construction work for planned developments. They are an alternative source of finance for the developer which offers the investor a secured return on their money, normally after a fixed term, once the construction is completed. This type of investment is known as asset-backed because the investors’ money is secured against assets that will be sold to return the investment, such as the land the property will be built on, or the property itself.

Regular Monthly Return

Like residential property investment, such as Buy-to-Let, investing in commercial property has the same potential to provide the investor with a steady source of income.

Long-term lease/Long-term return

Buying a residential property to let will usually mean, as the landlord, you are responsible for repairs and maintenance. A benefit of purchasing a commercial property to lease is usually the commercial tenant is responsible for these extra costs, making a huge difference to the potential return on your investment. Coupled with the fact that residential properties usually have a short term lease, generally 6-12 months, whereas commercial properties tend to have a much longer term contract from a standard 8 years up to, in some cases, 25 years; offering a relatively safe, long-term return on an investment.

Higher return. Higher risk

Largely, commercial properties will typically return a greater financial reward on an investment than residential properties. Investors can often benefit from a higher-rate fixed annual interest and the peace of mind and security provided by an asset-backed investment, such as property bonds. But as is generally the case with the potential of higher returns, this can come with higher risks involved but the risks can be managed if you choose the right commercial investment with terms and assurances you’re comfortable with.

Residential or Commercial?

Investing in property can prove to be a very profitable way to make an excellent return on your financial outlay, both in terms of income and capital gains.

It’s not so much a question of whether residential property investment is more lucrative than commercial, or vice versa; it’s more a question of the particular type of property investment that will work for you and the specific investment opportunity in question; and whether this is an investment, given all of the facts, that will potentially offer you the return you’re looking for; while ensuring you can commit to the level of continuing financial expenditure and personal time that may be involved in the type of and specific property investment you choose.

Research Property Investment Opportunities

Ensuring you conduct thorough research into the possible pros and cons of investing in both commercial and residential property before you commit to a particular type of property investment opportunity makes shrewd business sense; and should ensure you have every possible chance of making a successful and financially fruitful investment in this prevailing and ever-popular marketplace.