Why choose commercial property over residential?

Obviously this is the question every residential investor asks… whenever they are considering the transition across to commercial property.

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However, you will quickly discover the reasons are rather compelling.

Reason #1: Your tenants stay for longer

For the most part, you find residential tenancies will be on a month-by-month basis… maybe 6 months, perhaps for a year if you’re lucky.

Whereas commercial leases will tend to range between 3 and 5 years - and it can often be for longer. That means you have fewer tenancy changes, and a far more predictable income stream.

Reason #2: You have greater control

When residential tenants wish to leave half-way through a lease, they simply need to find a suitable substitute tenant. And then, they will transfer the lease across to that person.

From there on, this new tenant becomes responsible for the rental, over the remainder of the lease term.

Whereas commercial tenants are running a business from your property. And whenever they sell their business, they also require your approval to “assign” the lease.

However, here’s the real difference: If the new commercial tenant defaults in paying the rental, you also have recourse to the previous tenant as well - because commercial leases are business contracts, enforceable by law.

Reason #3: You no longer need to pay the outgoings

Typically, residential properties will provide you with a 5% gross rental return.

From this, you need to pay the rates & taxes, insurance, maintenance and so on — leaving you with about a 2.5% to 3% NET return, at the end of the year.

Depending upon what (and where) they are… commercial properties will generate a 5% to 9% NET rental return, each year.

And that’s because commercial tenants are also required to pay the various building outgoings on top of their rental - making this a true NET rental return for you.

Reason #4: Commercial tenants maintain your property

As you know, if the toilet stops working in an apartment … the tenant asks you to send around a plumber. Whereas commercial tenants quickly attend to (and pay to fix) the problem themselves - so as not to disrupt their business. 

Furthermore, the overall appearance of the property becomes a reflection on them. As such, your property is maintained in top condition … at their expense.

Therefore, whether the lease requires it or not … most commercial tenants will regularly repair and repaint the property, in order to maintain a good corporate image.

Reason #5: Greater regularity with rental payments

Most residential properties are rented by individuals. Therefore, the rent is often paid in cash, by personal cheque or by direct transfer. And this can often vary in its timing.

Because they are running a business, commercial tenants consider rent as simply another regular expense each month.

And generally, this gets set up as an automatic Periodic payment - and can be specified as such, within the lease.

Bottom Line: In essence, you find yourself having to deal with the vagaries of individual people… as a residential investor.

However, when you become a commercial investor… you start to enjoy a more predictable long-term relationship with your tenants - based upon a proper business footing.

Doesn’t that sound like a far better arrangement - particularly when you can purchase a small office for the same price as a two-bedroom apartment?

 

This article was from: Property Observer - Chris Lang

Why Raine & Horne Commercial?

Our full-service commercial real estate network can provide in-depth knowledge of local and regional property markets, with insight and understanding that comes from being a part of a long-established national and international property group. Committed to personalised service and achieving unsurpassed results, our clients continue to benefit from our network strength, which allows substantial cross-flow of international referral, advice and investment.

The Raine & Horne Commercial network is comprised of 100% owner-managed offices and includes numerous industry leaders and award winners. We employ agents who are empowered, encouraged to share and who maintain first rate communication to deliver the best possible outcome with every transaction. We pride ourselves on staying abreast of local and national trends and developments in the property industry, resulting in consistently cutting-edge services and holistic solutions for our clients.

Our industry experts embody and respect the family-oriented values synonymous with the Raine & Horne Commercial brand, allowing us to provide a complete range of professional services for all aspects of commercial, industrial, retail sales, leasing and specialist properties.