If you’re looking to add a new investment to your portfolio, it’s worth considering the pros and cons of investing in commercial property vs residential property.
This is a question many investors ask, and ultimately it will depend on your own personal preference, and the opportunities available to you.
But, whether you’re team commercial or team residential, or perhaps a mixture of the two, there are a number of advantages and disadvantages to both approaches.
Investing In Commercial Property
Most people do not automatically think of buying commercial property when they first get into property investing. That’s probably because most people are much more familiar with residential buildings than commercial ones and so they stick with what they know.
However, that could be a mistake as there are a number of advantages to commercial property that will appeal to first-time investors, as well as a few negatives:
Pros
- Rental income is often more secure over longer periods of time thanks to lease agreements
- Often, little to no renovation is needed as the tenant will want to fit out the premises to suit their requirements
- A wide range of premises are available that suit any level of investor
- Tenants usually have the responsibility for repairs and maintenance rather than the owner
Cons
- Long leases can become more restrictive to the owner should they wish to sell
- It’s harder to put a firm value on a commercial property without extra help from experts
- Mortgages are usually more costly than for residential buildings
- You’re not immune from tenants going bust and struggling to find a replacement occupier
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Investing In Residential Property
Residential properties are the ‘go-to’ investment for most investors. They are easy to understand and there’s a plentiful supply of them which gives you lot’s of choice as to where you will create your portfolio.
With that in mind, let’s take a look at the major advantages and disadvantages of buying residential property as an investment:
Pros
- Higher buy-to-let yields are often possible – but only if you find minimise ’empty’ periods
- Mortgages are much easier, and cheaper to acquire and there are less legal regulations to comply with
- Capital growth can be achieved more easily, by renovating the property
- Residential properties are easier to value and easier to predict long-term growth
Cons
- Short leases can increase tenant ‘churn’ and leave you with more periods where the building is empty
- The owner is responsible for all repairs and maintenance that’s needed
- You may need to completely renovate a property before letting or selling it
- Rental income can fall should property prices fall in the area
So, who wins when it comes to investing in commercial property vs residential property?
It probably makes sense for most investors to have a good mix of both residential and commercial investments in their portfolio. This will offer some protection from the different factors that can affect both types of properties such as recessions and popularity of areas.
Better yet, look for buildings that attract both types of tenant. A shop with a flat above, for example, can be a great way to spread your risk and enjoy the best of both worlds.
Overall, whatever you choose, make sure you do your homework and understand exactly what you are getting yourself in to. Viewing the property beforehand is an absolute ‘must’ no matter which type you are buying.
If you do choose to make a residential investment, be sure to check out our guide on the top 5 ways to add value to an investment property.
