The five reasons to choose commercial over residential property

This is a question often asked by traditional residential investors when they're considering the transition across to commercial property.

And you'll quickly discover the reasons are rather compelling.

Reason #1: Longer leases

Quite often, you'll find residential tenancies will be on a month-by-month basis, maybe six months, perhaps for a year.

Whereas, commercial properties will tend to lease for between three and five years, and often for longer. That means you have fewer tenancy changes, and a far more predictable income stream.

Reason #2: Greater security

When residential tenants want to exit half-way through a lease, they simply need to find a suitable substitute tenant. And then, 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.

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 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: Commercial tenants pay outgoings

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

From this, you need to pay the rates and taxes, insurance, maintenance and so on — leaving you with about a 3.5% net return, at the end of the year.

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

However, commercial tenants are also required to pay the various building outgoings on top of their rental — making this a net rental return to you.

Reason #4: Commercial tenants operate a business

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 kept in good 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: Payment certainty

Most residential properties are rented by individuals. Therefore, the rent is generally paid in cash or by personal cheque. 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 bank transfer — and can be specified as such, in the lease.

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

However, as a commercial investor, you tend 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?