Residential vs Commercial Property: Which is right for me as a landlord?

The real estate market offers a fantastic investment opportunity to people, yet there are many different routes you can take. Here we will be focusing on residential and commercial property, weighing up the pros and cons so you can make a well-informed decision before investing. 

Residential Property 

Pros:

• Residential properties are known to be a low risk, medium yield investment option. You can either buy a property to renovate and sell on, or you could rent the property out to tenants. More people are renting residential properties than ever as the housing market is currently so volatile, making it a fantastic long term investment which provides a steady stream of income. 
• You can also access quite significant tax advantages. When you purchase a second home, it is considered as a business, so you are able to deduct your expenses from the rental income before tax, including any interest you are paying if you have taken out a mortgage. 
• One final benefit is that it is possible to invest without huge amounts of money. As long as you have enough savings for a deposit and any renovations that need doing, you could access a mortgage to purchase the rest of the property which you will then pay off monthly.

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Cons:

• Although you might have enough money to cover upfront costs, you must bear in mind that you are responsible for any essential property costs. This could be something as small as a broken gate or as big as a faulty boiler. You must ensure you have enough money to rectify any of these issues. 
• If you are not using a property management company and you are taking sole responsibility for any maintenance, then you need to be available for emergencies. This restricts the potential investment areas as you should be in close proximity to the property. You will have to prepare yourself for late-night calls when someone has lost their keys and needs a spare set, or if the fire alarm won’t stop. 
• If you struggle to find tenants, then your property could be empty and losing money for months on end, although this is less of a concern than if you are wanting to sell the property.
• If you choose the renovate and sell route this can also be difficult. With the ongoing financial uncertainty in the UK, people who might have been considering buying a house before the pandemic may be reluctant to now. 

Commercial Property

Pros:

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• The earning potential of commercial real estate is much higher than residential. Although the risk is slightly higher, with that comes an increased potential yield. If you are wanting to take a risk, invest slightly more money and benefit from great returns, this could be for you. 
• When you are renting out a commercial property, it can lead to great networking opportunities. You will create fantastic contacts which you could utilize in the future. 
• In terms of your time, the hours are likely to be much more sociable than with residential. Except for rare emergencies like break-ins, major leaks, or a fire alarm going off, anything else will be able to wait. 
• Usually, commercial properties are associated with longer leases, meaning once you secure a tenant, you do not have to worry again for quite a long period of time. Ensure you have a lease review to ensure that the terms of the contract are fair for you as well as the tenant, as this will strengthen the relationship and increase the likelihood of renewal. Look for secure and reliable tenants and you can enjoy the benefits of your investment. 

Cons:

• You need quite a bit more money to invest in commercial property compared to residential. The ongoing costs are also much higher. 
• Managing a commercial property on your own is a massive job, so working with a commercial property management company is advised. This is a significant cost, so before investing you must weigh up which option is best for you and your budget. 
• The potential for things to go wrong that you are liable for is increased with commercial property. People could get hurt at work, there can be incidents in the car park or someone could trip on a faulty piece of carpet. The list goes on and on, so you must consider this and implement a thorough risk assessment to reduce this risk. 
• With the pandemic, many businesses retreated from offices and adjusted to life working from home. As companies began to see the benefits of staff working from home, it is likely that this is something they will permanently offer staff if they wish, so the demand for commercial spaces could drop dramatically. In the current climate, this is something to seriously consider before investing. 

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Final Thoughts

There are always risks with any investment, so it is important to ensure you are well informed before taking the leap. Do your research, be realistic about your financial situation and consider how involved you want to be and this should help you to make a decision about whether the residential or commercial property is right for you as a landlord.