The Big Debate: Investing In Commercial Vs Residential Property

2017-12-06


Property is traditionally a very popular asset for investing[1]. Investing in either commercial or residential property can prove to be lucrative, but as with any investment opportunity, there are also the necessary risks attached. For those looking to invest in property, one of the biggest considerations is whether to invest in residential or commercial opportunities and which path is right for you.

Naturally, for any investment choice, it is important to conduct comprehensive research so that you are aware of the risks, benefits and factors that may play a part in your decision-making. After all, the purpose of your investment will be to maximise the return on the time and money put in. To help start the process, here is an essential guide to the differences for investing in commercial vs residential property.


What is the difference between commercial and residential property?

One of the residential investment methods is through the buy-to-let market[2]. Investors will usually purchase a property that will be a home and will see the return on investment through rent, and in cases, rising equity. Residential property investment can be self-managed or cared for by an agent.

On the other hand, commercial properties are those which could be managed by a professional management company and are often built in relation to the economic growth and demand[3]. There are three main types of commercial property: retail, industrial and offices.

As you may expect, commercial properties are predominantly managed through professional management companies and may often use collective investments. Understandably, commercial properties will generally command a higher price, and therefore need larger investments. Of course, some commercial sites will be comparable to the cost of investing in residential properties and may even be lower such as a shop, parking space or a hotel room.


What are the benefits of residential property investment?

The two main reasons to invest in residential property is to receive a return through rental income and selling for profit if you can buy the property at a lower price than you sell it for. The risk for residential property is if the housing market slows down and the fluctuations in the rental market.

You may have to be prepared for periods where you don’t receive an income, especially if you tie all of your money up in property[4].


What are the benefits of commercial property investment?

For commercial properties, a longer lease structure[5] is usually applied and can be incredibly beneficial to investors compared to a shorter contract for residential properties. A standard shorthold tenancy agreement, for example, is usually 12 months long[6]. This can mean that income is guaranteed for a longer timeframe, which many may see as being more secure. Depending on the structure in place, there is also potential security as a result of returns through shares.

Another benefit is the greater level of variation in commercial property investment ventures which can make property investment more accessible to a broader range of investors.

As with any investment strategy, commercial property investment also has its downsides. For example, longer lease lengths that are typical[5] of commercial properties may be harder to break. Commercial property may also suffer from rising interest rates, illiquidity and void periods too[7].


What are the investment opportunities?

There are three main investment opportunities for property;

  1. Direct investment – where you buy all or a share in the property.
  2. Indirect property funds – collective schemes that invest in property companies.
  3. Direct property investment funds – direct investment into a portfolio of properties.


Considerations for any property investment

Whether you choose to invest in commercial or residential property there are key factors to consider, which include;

• The likely return on investment in relation to the time period

• The level of control and input you wish to have

• Lease terms and legislation requirements for landlords

• Responsibilities for fees, costs, repairs and maintenance

• Capital Gains Tax exemption and VAT.

As with any investment, ensure that you consult an expert before investing so that you are completely aware of the risks involved.


Sources:

  1. ThisIsMoney / Cash Stocks Property Best Returns Past 30 Years
  2. The Balance / Different Types of Real Estate Investments You Can Make
  3. What Investment / When Investing In Property Is Commercial Better Than Buy To Let
  4. Money Advice Service / Investing in Property
  5. Statista / UK Commercial Property Rental Average Lease Length
  6. Which / Commercial Property Investment Explained
  7. Oneview / Commercial Property

Your capital is at risk if you invest in property. This includes illiquidity (the inability to sell assets quickly or without substantial loss in value), and the loss of invested capital if the wider property market or an individual property suffers a reduction in value. Investments on Homegrown are not covered by the Financial Services Compensation Scheme. Past performance and forecasts are not indicative of future performance. For more information see our full risk warning. Homegrown Group Limited is authorised and regulated by the Financial Conduct Authority (FRN: 694952). Investments through Homegrown are equity investments.
Future performance is not guaranteed and is based on projections only. Your capital is at risk if you invest in property. For more information see our full risk warning.