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Residential vs commercial property investment

If you’re considering making a residential or commercial property investment, understanding the difference between the two so you can make an informed decision is essential.

A residential property is usually intended as a home for individuals or families and includes flats, terraced houses, semi-detached houses, and detached houses. Most people who invest in residential property but don’t occupy the property themselves will rent it out to others so that they can generate income from the property.

A commercial property, on the other hand, is used solely for business purposes, and can include offices, warehouses, retail spaces, restaurants, and more.

Commercial property owners might choose to run their own business out of their space, but most investors in commercial buildings tend to lease them out to other businesses. A lot of companies prefer to rent a space rather than buy one as it can be a cheaper, more flexible option for the business.

Typically, an investor can expect to see the following differences between the two property types:

Residential Commercial
Profit Lower Higher
Initial investment Lower Higher
Length of lease Shorter Longer
Paperwork/admin Less More
Maintenance Landlord (usually) pays Tenant (usually) pays
Rent payments Monthly/weekly in advance Three months+ in advance

 

Estate,Agency,'to,Let',Sign,Board,With,English Houses in a background

Pros of being a residential landlord

  • It’s much easier to get a mortgage on a residential property than it is on a commercial property. Additionally, interest rates for buy-to-let mortgages are usually lower than for commercial mortgages.
  • Initial investment costs are much lower on buy-to-let properties than on commercial properties. Mortgage deposits for buy-to-let residential properties are usually 25% (or sometimes lower), making it easier to get your foot on the property ladder.
  • As house prices continue to rise, demand for rental properties remains extremely high. This means people act quickly when they find a property they like, so you won’t have to worry about a well-located property being unoccupied for long periods of time.
  • The buying process is much faster for residential properties. This means landlords can usually expect a quicker return on their investment.
UK property profit cash buyers buy-to-let mortgages

Cons of being a residential landlord

  • There are often more ongoing costs with residential properties, because the landlord is responsible for the maintenance of the dwelling.
  • You might find that tenant turnover is quite high due to residential leases being only six or 12 months. Landlords therefore risk losing income every time a tenant moves out, along with the additional cost of re-advertising the property.
  • Residential landlords can expect a lower return on investment than commercial landlords because the rent is so much cheaper. Landlords must also factor in things like the stamp duty surcharge when buying an investment property, which can impact your profits.
  • Residential investment properties can be hard to find and are often snapped up quickly, especially in sought-after areas where rental yield is particularly high. This is where organisations like BuyAssociation come in, helping residential landlords access some of the best property developments and unique investment opportunities before anyone else.

Pros of being a commercial landlord

  • Established businesses often stay in the same commercial space for longer periods of time, which means more financial security for the landlord.
  • Return on investment is usually higher for commercial buildings because the rent is higher, plus there’s the extra earning potential of having multiple businesses in one building or flats with separate leaseholds.
  • In most cases, commercial landlords aren’t responsible for any repairs or insurance, with this responsibility instead falling to the tenant. Commercial tenants will usually pay for and arrange the repairs directly or via an additional service charge.
  • As a commercial landlord, you’ll usually only have to work during business hours. By comparison, residential landlords can be on call 24/7 and might have to resolve issues with the property outside of working hours.
  • Because commercial tenants are usually professional business owners, landlords can be less concerned about the property being left in poor condition.
  • Commercial tenants usually pay three months or more in advance, which means commercial landlords have a cash flow advantage over residential landlords.
tax review landlords buy-to-let mortgages mortgage rates

Cons of being a commercial landlord

  • Buying commercial property requires a much greater initial investment than residential property. You will need more money for the mortgage deposit and for any work the property needs before it can be leased out.
  • If your commercial property is vacant, you will have to pay business rates. This could be expensive if your property is empty for a long period of time.
  • Commercial properties are more expensive to keep, with additional regulations for fire escapes, automatic vents, and dry risers potentially costing thousands.
  • There is a significantly lower appetite from occupiers for commercial properties in comparison to residential properties, which are always in high demand. This has been exacerbated by the increase in hybrid working, reducing the amount of office space needed for many businesses.
  • Commercial landlords will often have to spend more time completing admin and paperwork due to the complex nature of commercial leases. Most commercial landlords hire lawyers to help with this, which is another potentially large cost to consider.
  • Interest rates for buy-to-let mortgages on commercial properties are usually much higher than a residential loan.

Stay ahead of the market with BuyAssociation

At BuyAssociation, we provide exclusive access to best-in-class properties for investors and homebuyers in prime locations before they go public. We only seek investments that we anticipate will have high returns in order to best serve our clients.

When you partner with BuyAssociation, you’ll be the first to find out about discounted residential properties sourced directly from some of the country’s most reputable developers, while our experienced team of consultants offer a tailored service to help you meet your investment goals.

Our unique market positioning, solid industry knowledge, and group buying power, helps us stand out as a distinguished and experienced partner for property investors across the UK. 

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