Residential Vs Commercial Property
When most people think about starting to invest in property they naturally gravitate towards residential property and the buy-to-let investing strategy.
It’s familiar, comfortable, relatively easy to understand that people have a need and desire to live somewhere, therefore are willing to pay rent for that shelter.
Commercial property is more complicated to get your head around, but there are so many pros for this property strategy.
Take a look at the pros and cons of both residential buy-to-let and commercial property investing strategies below, to give you all of the options available so that you can make a more informed decision regarding your next steps.
1. Availability
In any business you would look at how available the item that you want to source is. With residential property in the UK, there are around 27 million properties available. Everyone needs somewhere to live, therefore the demand is extremely high for residential properties. There is also a HUGE shortage of residential properties available in the UK for people to live in.
This means that the competition for people looking for properties to rent is really high, and as a business owner who has that residential property stock, you have a readily available stream of tenants looking to rent your property.
This is positive for residential property, but on the commercial property side, it is quite different.
With commercial property you have a huge number of industries and businesses that require different class types of properties. Anything from office blocks, schools, churches, pubs, warehouses, factories, land and more - there’s such a wide variety of types of commercial properties that can feel daunting to investors. It feels complicated to some to get your head around which one you should focus on.
With commercial property it’s much harder to evaluate the availability of stock, unless you go niche and target one particular class type of commercial property.
This is the first area we recommend you to look at when it comes to investing in property. What does the supply and demand look like in that industry?
We know that on the residential side it’s far easier to see what the supply and demand is favourable for you as an investor.
2. Lending
How are we going to buy this asset class? On the residential property side, banks are comfortable with the property having an intrinsic value because someone is always willing to spend money and pay rent to live there.
You get a higher loan to value (LTV) when you invest in residential property than you do with investing in commercial property.
Typically speaking you get 75% LTV, in some cases up to 80-85% LTV depending on what the market is doing.
The interest rates on residential lending is really competitive, tends to be on the lower side compared to commercial lending and it’s very straightforward. Lenders look at the asset class, your credit profile and they will lend if the rent cover matches with what the mortgage payment is going to be.
On the commercial property side, lending is a little different. You’ll probably need more niche lending, which typically means it will be more expensive. Along with that, the LTV tends to be on the lower side, you’re looking at 50-70% LTV. In some cases you can get up to 75%, however, if you base your LTV on the lower side to be more conservative, that will keep you safe.
Another factor on the lending side that you must consider is on residential investments, banks expect you to pay interest only, because they understand the value of that asset is going to increase over time. So, the ability to clear the outstanding capital on that residential investment mortgage will be far more straightforward.
However, with commercial property, different lenders take different views on this. There is the odd lender who will be comfortable with you paying back interest only, however, the majority like you to do a capital and repayment on that lending. You may be offered an interest only period of 12-24 months initially, but they will then move to a capital repayment because they like you to own that commercial asset outright.
There are some really creative ways you can fund commercial properties. For example, using pension funds (in some cases you can also do this on the residential property investing side as well).
One thing investors should think about is “Who is my competition? Who else is out there providing the same service that I’m looking to provide? How many other investors are looking to purchase this type of asset?”
Because residential property investing is more familiar to people, there’s a much higher number of investors in this sector. That’s not the case in the commercial property market. Because people know less about it, they believe it’s more complex and difficult to get into, so therefore shy away from it. This is a HUGE positive for commercial property, because investors can play the game they want and create the deals they want far easier than on the residential side.
3. Exit Strategies
The other factor you need to consider as an investor is what are your exit strategies going to be?
In residential property you have a few open to you.
• You can convert a 1-bedroom flat into a buy-to-let. Rather than an owner living there, you can rent it out as a single buy-to-let.
• With a larger property, you could turn it into a multi-let or HMO. You could also offer it as serviced accommodation, or social housing, or assisted living.
But that essentially is it.
However, with commercial property you have a HUGE remit available to you. You can do a variety of creative strategies such as:
• Convert a commercial unit into a residential unit
• Convert a commercial office into a hotel
• Convert a church into flats
There are SO MANY different options available to you on the commercial side that aren’t available to you on the residential side. This can be viewed as exciting, but daunting if you don’t know how to get started.
4. Pros & Cons of Residential and Commercial Property from an Investors Perspective
The pros of residential property are:
• Demand for rental accommodation in the UK is sky high. The population keeps increasing and house building rate can’t keep up with demand.
• The lending is relatively straightforward if you’ve got a good credit file. Lenders are keen to lend on residential properties, you have a higher LTV, interest rates are competitive and more affordable.
• People understand residential property because they live in one. They understand what it looks like, feels like, what it’s going to cost and make them.
• Property prices are steady, they are predictable, they are on an upward trend line in terms of value and price. They’re viewed as a reliable investment asset.
The cons of residential property are:
• You are dealing with tenants. There is much more weight on the landlord’s responsibilities and the landlord being involved in managing the tenants. Maintenance, upkeep, insurance and safety are all the landlord’s responsibility. The law in the UK for tenancy is weighted in favour of the tenant rather than the landlord.
• There’s more competition because people understand it more and it’s an easier entrance point as an investor. You’ll have owner/occupiers, amateur investors and professional investors all as competitors. Properties tend to move far quicker when they come on the market for sale. It’s a fast moving market compared to commercial properties.
The pros of commercial property are:
• You can be far more creative and open with the vendor at creating and structuring a deal that works for both parties without too much competition coming in and blowing you out of the water.
• The agents work far more proactively for you as an investor. They will go out and actively source the specific type of property you’re looking to secure. You feel as though you’re covering a wider market and leveraging off the agent's time with them doing all of the ground work compared to residential property.
• There are far more ways to add value with commercial property by changing the use class, developing and increasing the number of exit plans that you have.
You can get some niche lending that will support you, secure, develop and even exit while keeping the commercial asset.
• It’s far more hands off than residential property. Once a tenant is in, they’re on a FRI lease which means they maintain and look after the property as well as deal with any issues that might arise. It’s much more low maintenance than residential property.
The cons of commercial property are:
• You have lower LTV, so you have to come up with a bigger deposit when purchasing.
The works carried out on commercial properties can be more expensive.
The interest rates on commercial property lending tends to be slightly higher than residential lending.
• If you put all your eggs into one industry’s basket e.g. office space, and then something happens to the requirement for this industry e.g. people stopped going into the office during the pandemic and now more people work from home, it can take a lot longer to solve this issue. If you’re not willing to develop the property and change its use then the property might sit empty for a number of months, which you wouldn’t have on the residential side.
• If you’re looking to sell a commercial property, it tends to move a lot slower than the residential side. But, that completely depends on the location, industry and type class of the property.
Residential property and commercial property are completely different. So treat them both with the respect they deserve and make sure you get educated before you get started in order to avoid costly, time consuming mistakes.
Overall, we are HUGE fans of both residential and commercial properties. We think the best idea is to have a diverse portfolio in order to keep your property business safe and secure. Don’t be scared to get into commercial property, the best way to get started is to speak to and learn from the experts that are doing it successfully themselves.
That’s why we want you to join us at our virtual Commercial Property Discovery Day at 7pm on Sunday, 12th March 2023:
How To Make BIG Money With Commercial Property
You will discover how to:
• How to create SUBSTANTIAL cashflow from buildings others miss
• Make £150K when you flip Commercial Property without doing a refurb!
• Learn the benefits of Commercial Property from lower stamp duty and FRI leases
• Add MASSIVE value to Commercial Property by changing its use
• Upscale your Serviced Accommodation and get into hotels
…and more!
Spaces are limited as I’m keeping this virtual event extremely exclusive to answer all of your questions. Make sure to reserve yours below: