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Commercial or Residential Property: Which is a Better Investment and Why?

Commercial property vs residential property
Written by bullish buys

Investors find property investment as one of the best ways to grow their capital. But knowing where to invest is something one must deliberately research and understand. Whether to opt for commercial property or residential property is a huge head-scratcher!. Worry not as we have done the research work for you. Read till the end to know our verdict. But before that, let’s take you through a brief introduction about each of them as well as their characteristics.

What is Residential Property Investment?

Investing in homes that are built for tenants to occupy are called residential property investment. This type of investment is also called a buy-to-let investment. Rental incomes are the returns received from residential property investment.

What is Commercial Property Investment?

Investment in immovable assets that are only done for business purposes is called commercial property investment. This type of investment also gives returns by the means of regular rental income.

Commercial or Residential property- Which is better property investment?

We have done a simple comparison between commercial property investment and residential property investment. This helps in better understanding profitable investments for you.

  • Commercial properties have higher profit potential than residential properties

Commercial properties get higher yields and generate 6-12% of the purchase amount per year. For better insight,  imagine the difference between the per room rental income with per property income. Residential properties can make only up to 1-4% of their purchase price per year.

  • Commercial properties involve higher investment risks than residential properties

There is a higher chance of financial risk involved in commercial property as the initial investment amount is huge. Also since the property will be used by multiple businesses, there can be damages and other safety issues involved. This can add to the existing burden. Residential properties are less expensive than commercial properties and also require fewer maintenance costs.

  • Residential properties are less likely to be affected by the recession than commercial properties

During economic slowdowns, if businesses do not run well, it becomes difficult for them to pay the rents. Commercial landlords can have a tough time making up the rental arrears. Whereas residential properties can never get affected by the recession.

  • Commercial properties offer higher tenant security than residential properties

Commercial landlords do a lot of research to find tenants, hence they choose only the reliable and trustworthy ones. The tenants of commercial properties are mostly business owners so they maintain professional relationships with the landlord. They are also responsible to keep the premises neat and well maintained. On the flip side, residential landlords often face troubles with bad tenants.

  • Residential properties involve minimal paperwork when compared to commercial properties.

There is a lot of paperwork involved in commercial leases. Landlords have to spend hours gazing through various forms. Commercial landlords usually hire lawyers to do this tedious process. Residential properties require less research and paperwork. Hence, it is possible to welcome tenants as quickly as possible.

  • Commercial landlords can get the perks of better-advanced payment when compared to residential landlords

Commercial landlords can receive the advantage of collecting at least three months advance payment. Whereas residential landlords can get advance payment just one month ahead.

  • Residential landlords can easily find tenants which are not so easy for commercial landlords.

It’s relatively easier to find tenants for residential properties. Since the demand is increasing, residential landlords will have to hardly wait a few weeks for their new tenants. But this isn’t the case for commercial properties. Waiting time for the next occupants is more compared to residential properties.

  • Commercial leases are often longer than residential leases

Leases for commercial properties can last up to 10 years whereas for residential properties they can last anywhere from six to 12 months. Commercial landlords do not have to go behind advertising frequently. And do the entire renovation or cleaning over and again as residential landlords.

Final verdict

Be it commercial or residential properties, both have their pros and cons. Commercial properties may offer you lucrative yields but are often financially risky. Residential properties may not give you a handsome revenue but are considered a safer investment option. So it depends on the investors and which side of risk they can afford.

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