We all know the main difference between residential and commercial property investment; the former is investment in properties that people live in (tourists are still living in) in any form, whereas the latter is investment in business premises of any kind in any form. But that is simplistic; there are many differences between the two. Here are some of the main ones.
Clients/Tenants
Arguably the main difference between investing in commercial property compared to residential is the clients, also known as tenants. Residential property is let to consumers, and commercial property is let to businesses.
Residential Property Investment - Consumer Tenants
Everybody on earth (well almost everybody) is a consumer, the good, the bad, the ugly, and the downright criminal. Residential landlords can tell some of the worst tales of human depravity known to man; wrecked properties, stolen furniture, and worse, much much worse. Of course most residential tenants are perfectly fine people, and as always in life it is the actions of a rotten few that make it more difficult for everyone else.
The worst problems exist in places like the UK where the law is heavily in favour of the tenant to avoid landlords being able to evict at will based on things like minor disputes, or starting a mixed-race relationship, supporting an opposing football team etc.
Commercial Property Investment - Business Tenants
Business customers are much more likely to care about the property they inhabit, for obvious reasons; having a pleasant environment for staff to work in and/or for consumers to consume in. Again, obviously business tenants have been known to be terrible tenants, but on a much smaller scale than residential tenants.
Opportunities
Commercial investment tends to hand investors a much wider range of potential investments, for example there are more commercial property investment funds than residential ones. This is probably for the reasons given above and the additional difficulties they add to managing rental properties.#
For example you can invest in commercial investment property, or funds which invest in property, or shares of property companies. But it is partly because of interpretation, residential investment has funds, and shares opportunities, but it doesn't have the same range of companies involved, for example asset management companies are predominantly only involved in the commercial sector. Seek commercial property investment advice to find out the full range of opportunities.
Yields
Commercial property investment yields tend to be better than residential yields, and again this comes down to the differences in the tenants. Business customers are usually only there in business hours, they don't leave the bath running and flood the building, they don't leave the cooker on and burn the building down, and general wear and tear is also lower on commercial properties.
Law
Remember the bad residential tenants mentioned above well, most landlords blame the law, which purposely makes it very difficult for residential landlords to evict their tenants. Even when tenants aren't paying rent and are causing damage to property it is still very difficult for the landlord to evict. This is why it is essential that all residential landlords vet tenants.
For commercial landlords eviction is usually much easier. Take commercial property investments in the UK for example:
If the tenant stops paying rent. The landlord need only wait till the rent is overdue by more than the time period specified in the lease for forfeiture (usually anything up to 28 days after the rent payment date). They can then go in with a locksmith, change the locks and put a sign on the door saying the premises have been repossessed. You then give the tenant 7 days to come back on appointment to collect his belongings. Most people will instruct a bailiff to do the repossession in case things get nasty and they are commonly done very early in the morning.
*This page is provided for information purposes only and should not be construed as offering advice. IPIN is not licensed to give financial advice and all information provided by IPIN regarding real estate should never be treated as specific advice or regulations. This is standard practice with property investment companies as the purchase of property as an investment is not regulated by the UK or other Financial Services Authorities.