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Residential Vs Commercial – 6 Killer Differences To Know Before Investing
When you prefer to park your spare funds into more rewarding vehicles rather than the boring fixed deposits, real estate is something that most people seriously mull over. And when the decision is made to invest in properties, the next decision to make is usually whether to go residential, or commercial. There is no shame in admitting that you are still undecided on which route to choose. It is not an easy choice to make when we consider the benefits and disadvantages of both. The silver lining is that you can usually decide which one to select once you get in touch with these key differences between the 2.
Contracts and people
When dealing with residential properties, you will be dealing with people with their own opinions, interpretations, and rights, etc. And when dealing with commercial properties, you are essentially dealing with contracts that clearly state terms and remedies.
In many places in the world, government regulations can determine the rules of engagement no matter how favourable is the lease agreement you have signed with a resident. This really put into perspective why there is an agreement contract in the first place. So if your tenant finds the terms or penalties you enforce on them as unfair, they can get the authorities involved. In which case, you will usually lose as government agencies usually side with tenants perceived as being taken advantage of by a money-grabbing landlord. You only have to look at eviction laws to realise how favourable they are to tenants.
With commercial tenants however, every term listed in the tenancy contract is usually what goes when disputes or remedy action arise. Late rentals are usually tolerated for residences without any penalties. But for commercial contracts, landlords usually insert terms that include the charging of interest on late payments. And when payment is still nowhere in sight, a commercial landlord have the right to takeover the premises. You cannot do that to residential tenants and have to strictly follow eviction laws to the letter.
The main point here is that for residential properties, you can expect government agencies and regulations to favour tenants more than they do for landlords. You can also expect to be on the bashing end of a public backlash if news of your dispute with a tenant leaks out to the media. But this does not mean that governments will side with landlords with commercial real estate. It just means that it is more of an equal playing field where you are dealing with a business. And the rules of the game being played will be spelt out in the lease agreement. This is why it is always worthwhile to hire an accomplished attorney to draft out your contracts.
The typical residential tenancy agreement is short term. It usually last for a period of 1 or 2 years. In some cases, even on a rolling basis from month-to-month. Tenancy periods for commercial contracts tend to be much longer. This is partly because of the business needs. For example a retailer will have a more long term view of a location as the longer they are situated at a location the more people will know where they are located when they want to drop by. Companies making a big investment in their business will also be more receptive to long term leases. This is so that their investments for things like equipment, systems, marketing efforts, etc, have a longer lifespan.
Care and improvements
Residents usually do not spend money on improving the house. They have no reason to spend their money for the benefit of the landlord anyway. Housekeeping is also often a service that the landlord arranges. Companies however, tend to have no qualms on using their own money and resources for improving the workplace. They have every incentive to manage commercial properties themselves.
Not only will improvements make clients and visitors more comfortable, they serve a branding purpose as well for an organisation. But even more importantly, improvements at the workplace can improve their own efficiency and make it a happier place to work for employees as well.
When things go wrong at a residential house, tenants will call up the landlord and leave it to him to settle everything. But companies usually take care of such issues themselves. They generate an income on the premises and will want to solve issues as soon as possible. But is must be mentioned that replacements due to wear and tear occur more frequently at commercial properties compared to residential. This is partly due to usage.
Pool of tenants
This is probably the biggest disadvantage for commercial properties. The market is huge for residential tenants. Most of the time, you can place an advertisement in the classifieds property listings and expect to receive calls form prospects the same day. This means that losing a tenant has a much smaller negative impact on your business. Whereas it can sometimes be very challenging to find commercial tenants. The difficulty multiplies when you have a property that is built for a particular type of niche business. It narrows the scale of prospects you can reach out to.
For example, if you have a mega sized warehouse, there are really only so many companies out there with the appetite to take up that kind of space. Or if your unit is located in an area for heavy industries, only companies in that type of business will be interested. And there can be many barriers for heavy industrial organisations to move to a new location. It can be costly for them and with a lot of logistics planning involved.
And for residential properties, a landlord is usually dealing with the decision maker. But for commercial tenants, landlords very often do not even meet the decision maker. This make people more easier to sell to compared to organisational hierarchies.
Commercial and industrial properties are not always more expensive than residential properties as generally perceived. The reason why there is such a perception comes from the capital outlay required due to loan to value mortgage restrictions. Comparing a property of each type at the same price, a home will usually have a higher loan-to-value compare to the office. This can be due to regulations or simple risk profiles set up by the lenders.
Implicit residential knowledge
Most of us will have implicit knowledge of what to look out for when inspecting a house meant for a family. We would notice when there isn’t a stove, when there is not enough space to install a shower screen, or when a particular room is undoubtedly the master bedroom, etc. This is a big reason why most investors stick to homes rather than offices.
But when you are a newbie buying an industrial factory for example, you could be out of depth to even comprehend what you are supposed to look out for. You would not know about the safety standards required by law, the standard requirements for a ramp for easy loading and unloading, how much volume of inventory the space can realistically hold, etc.