This week we’ll discuss the advantages and disadvantages of both residential and commercial property. Many Landlords we come across often ask us which sector yields a higher return. As usual, let’s start with definitions.
What is Residential Property?
A building that is used as a dwelling or is in the process of being constructed or adapted for use as a dwelling. This includes terraced houses, semi-detached houses, detached houses and apartments for single people, families and multiple people living in a HMO.
What is Commercial Property?
Commercial property is any non-residential property used solely for business purposes. This includes offices, industrial units, storage, medical centres and hotels.
Advantages of Residential Property
- Obtain a Mortgage – It is both faster and easier to obtain a buy-to-let (BTL) mortgage. Interest rates are lower compared to commercial mortgages, therefore you have lower interest repayments.
- Quick Income – Turn-around time from putting an offer in with an estate agent, completing on a property, renovating and renting out is generally faster than commercial. You could turn a house into a HMO to increase income.
- Less Surprises – The bigger the building or project the more potential there is for something to go wrong. Either way, always have a contingency plan and budget.
- Low Initial Investment – A property of £100k only requires a £25k deposit. If the property was let for £7,200 per annum, your gross return on investment (ROI) on the initial £25,000 investment would be 28.8%. After interest repayments, insurance, letting agent fees and maintenance you can still net 10-20% which is better than keeping your money in the bank!
Disadvantages of Residential Property
- High Competition – There are tens if not hundreds of people like you looking at residential BTLs. This drives up prices and makes it difficult to find a property that will achieve your target ROI.
- Fast Turnover – Residential properties don’t stay on the market long. You may have found that you have to be quick to go under offer to secure the property to prevent the risk of losing out.
- Travel Time and Costs – If the property you purchased is a long way away, you may have to invest time and travel costs. However, if you have bagged yourself a bargain that is generating a solid return, it may be worthwhile handing it over to a local lettings agent.
- Evicting Tenants – If a tenant on an AST stops paying rent, it could take months to get evict them. You could end up losing several months’ rent and damages.
- Stamp Duty and Mortgage Interest Relief – Stamp duty has increased and the less favourable tax relief available on mortgage repayments have dampened the demand for residential buy-to-let investments. You can read more on stamp duty.
Advantages of Commercial Property
- Longer Lease Structures – Financially secure, established businesses generally stay for long term. Therefore, voids are minimised and it’s easier when you come to remortgage – compared to a ‘License to Occupy’ agreement.
- Mixed Use – Commercial properties are generally larger properties and can be converted to a mixture of uses. Several incomes streams can be generated from the various uses. Have a look at our case study of The Enterprise Hub, a conversion of a former mill into a business centre and apartments.
- Higher ROI – Generally speaking, the return on investment is higher. For example, by developing the building into flats with separate leasehold titles, you can then either rent or sell at a substantial profit.
- Add Value and Remortgage – You can remortgage after 2 years and take all capital invested out. In larger buildings, if you buy on bridging finance and it generates a substantial income, it is possible to get the property revalued significantly higher when fully let. You can then use this capital on your next project!
Disadvantages of Commercial Property
- Extra Costs – New regulation such as additional fire escape staircases, dry risers, fire action plans and automatic opening vents can add £10,000s to the project cost in large buildings.
- Higher Interest – Commercial loans are 6-7% – higher than a residential mortgage.
- Disagreements – You may buy a commercial property with an investor or partner. There is a chance of falling out, whereas in residential you can go it alone.
- Business Rates – The landlord is liable to pay business rates when a property is vacant. This could be costly if the property stays vacant longer than anticipated, potentially forcing you to sell the property. You can read more on business rates.
If you have money sitting in the bank, there is no better time to invest than the present. If you are new to property, it is best to start small, maybe with a back to back, to see if property is for you. If you have been in the game for a number of years, you may have a business model that works for you and prefer to stick to residential. For someone who has a portfolio of properties behind them, you may want to venture towards acquiring a commercial property. Always do your homework and come up with a business plan. Ask family or friends that have commercial buildings for advice. Be aware of the pitfalls and if it is a viable opportunity then go for it! If this article has helped you in any way, please feel free to contact us and let us know. Alternatively, if you have anything to add, please get in touch! Read last week’ post on student or young professional lets?
Thank you for reading and next week we’ll discuss another exciting topic! If you have any questions or need to chat to us, please feel free to contact us. In the meantime, why not visit our blog. Or sign up to our Mailing List to receive automatic updates of new blog posts and exciting competitions.