If you are an investor who is trying to decide between investing in a commercial or residential property, you’ve come to the right place. Both types of property investment can come with great benefits for investors, but making the right choice is one that is highly dependent on your unique needs and long term goals. In today’s article, we have a look at some of the main differences between commercial and residential property investment, so grab a cuppa and read on to find out more!

Outgoing Expenses

When it comes to cost, the outgoing expenses on commercial properties tend to be significantly higher than that of residential properties. More can go wrong in a commercial property and Investors need to stay vigilant when it comes to matters such as commercial plumbing services, air-conditioning service and many other aspects of maintaining the property. 

On the flipside, residential properties prove to be much less challenging when it comes to outgoing expenses and responsibilities as upgrades, repairs and additional fixtures remain at a minimum and often cost significantly less than it would in a commercial investment property. 

Length Of Lease

Commercial properties are primarily used for business and therefore often have much longer leases than residential properties. Leases also play a crucial part in determining a commercial property’s value due to the fact that replacing a commercial tenant is significantly more difficult than replacing a residential one. Commercial properties are also more vulnerable to economic shock unlike residential properties that perform relatively well against economic slowdowns.

When it comes to residential properties, it is not uncommon for leases to last anywhere between 6 months to 1 year, depending on the individual needs and circumstances of a tenant. This can prove to be somewhat challenging if finding long term tenants is difficult as landlords will be required to hold viewings and open houses more often than they would with a commercial property. 

Quality Of Tenant

It goes without saying that the value of a commercial property is highly linked to the quality of tenant it attracts. Highly desirable tenants with good reputations in their field and that are backed by profitable investors can bring an enormous amount of reliability and surety to the underpinning of the property and often require long term leases due to the size of outlets. 

Residential property on the other hand, is prone to the risk of robust or irresponsible tenants who may miss rental payments and damage the existing property. Considering residential property tenants do not impact the property value in any way, it leaves no opportunity for landlords to increase property value by having a better tenant in their investment home. 

Accessibility 

Let’s be honest -- not everyone has the means or the funds to invest in a commercial property. Residential property on the other hand, is much more accessible for most young adults who are looking to put their money into something worthwhile. For example, with banks requiring anywhere between 5% - 20% down payments for a home, an investor could own their own home for as little as $50,000 for a $250,000 property. 

Commercial leases are of course a lot pricier (up to the millions), and are much more difficult to purchase as an individual investor. Considering banks are usually only willing to accept a 40% deposit on commercial properties, this can prove to be challenging for anyone who doesn’t have millions of dollars in their savings account. 

Risk Factors

Considering the cost of commercial properties, they do prove to carry more risks than one would encounter with a residential property. This is mainly due to the fact that commercial properties are much more susceptible to market conditions and economic crisis, whereas people always need homes to live in, thus making residential properties a lot less risky of an investment. Understanding these risks and weighing out the pros and cons is an essential step for anyone who is looking to invest in property, and discussing your thoughts and ideas with an accountant or financial adviser is almost always recommended! 

The Simplicity Of It All

As you probably imagined, residential property investment is far less complex than its commercial counterpart. Information about property investment is abundant online, and most people probably know of at least one person who has invested in a residential property. When it comes to commercial property, you can expect quite the reverse. 

Commercial property has a lot more factors to consider, including due diligence, lease and purchase negotiations, commercial financing, and many more. Many those to utilise the services of a commercial property syndicate who will be able to handle the entire transaction in its entirety. Do note that using a syndicate will cost you a fair amount on top of the cost of your investment, so always discuss the matter with your financial advisor before making any significant decisions. 

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Whether you’re looking for the simplicity of residential property or the long-term cash flow of commercial property, there are many factors to take into account before making your final decision. We hope that this article has given you some insight into some of the many factors you should take into consideration, and as always, as always, speak to your accountant before proceeding with any type of investment.