Commercial vs Residential - Some points to consider when investing in property
#1: Tenants tend to stay for longer in commercial leases
For the most part, residential tenancies can be on a month-by-month basis – maybe 6 months, perhaps for a year or two if you’re lucky.
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.
#2: Commercial leases are business contracts, enforceable by law
When residential tenants wish to leave half-way through a lease, they can simply find a suitable substitute tenant. They can then transfer the lease across to that person.
From then on, this new tenant becomes responsible for the rental, over the remainder of the lease term.
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
#3: You no longer need to pay the outgoings
Typically, residential properties provide 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 can generate a 5 – 9% NET rental return, each year.
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.
As an added bonus, many commercial tenants will also fit out their premises at their own expense, which in turn can increase the value of your property.
#4: Commercial tenants maintain your property
In residential properties if the toilet stops working in an apartment, the tenant asks you to send around a plumber. Commercial tenants tend to 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.
#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. This can be unpredictable and often vary in timing.
Because they are running a business, commercial tenants consider rent as simply another regular expense each month, generally setting it up as an automatic Periodic payment meaning rent is paid on time. Payment by automatic periodic payment can also be specified within the lease.
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