Residential or Commercial Property Investment

What's the Difference between Them?

I had a chat with a friend of mine the other day. He's unfamiliar with commercial property investment. He assumed that it's not that different from residential investment property. As house owners, we are all experts! Right?

He thought commercial property investment was as "safe as houses".

But he was wrong! The bedrock of commercial properties is occupational demand and having somewhere to live will always take priority over having somewhere to work.

Nevertheless, the risk/reward of commercial investment property is highly attractive compared to other asset classes.

To give you a few examples of the vast differences between residential and commercial property

• A buy to let investor will probably let out to a private tenant on an Assured Short-hold Tenancy agreement for a year or two. After the tenant vacates, the landlord may have to redecorate and repair the premises. He's likely to have a four to six week void period until the property is re-let. On the other hand a prime commercial property investment will be let to a "blue chip" corporation on a 10-15 year FRI (Full Repairing Insurance) lease. During this period the lease could be assigned or sublet, subject to landlords consent, with no loss of rent.

• The rental income you receive from residential property is sometimes sporadic and uncertain. Commercial income is well covenanted, regular, and certain.

• Returns on residential property come mainly from increases in capital value. In commercial property the principal return arises from income.

Think about it. What could be more secure than an office building let to "Her Majesty the Queens" Government department on a 20 year lease with a guarantee rental return?

Can you see why the professionals and the big institutional investors prefer commercial property to residential?

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