Guest Blog: Residential and commercial letting – how do they compare?14th August 2013

The poor economic conditions of the past few years have kept rental demand high and ensured that residential property still represents a solid speculation for investors across the country. However, attracted by often higher rental yields and less uncertainty, it’s not uncommon for the buy-to-let investor to venture into the world of commercial property.



Let’s look at the two types of investment – how do they compare? 



The Yield



The most important aspect to the investor is, of course, how much income the property is expected to yield over a year. Recent research by Countrywide showed that residential properties could be expected to return between 5.7% and 6.6%, depending on where you buy in the UK. 



Commercial properties, such as shops or industrial areas, can offer higher rental returns but their valuation yield, which measures the asset’s market price, is usually lower than for residential properties. Because house prices typically fluctuate more readily than offices or industrial areas, residential investors make a greater percentage of their capital through selling their properties after they’ve ameliorated in price over a set period. 



This does indicate the extent to which residential investors are at the mercy of the property market – a crash like 2008 would be much worse for an investor with 50 rental properties, for instance, than someone who owns a few shops on a high street and an industrial area. While commercial property also took a heavy hit in 2008, it’s significantly easier to choose three crash-proof commercial areas than several dozens of residential homes. 



The Cost



It won’t surprise you that, when it comes to cost, commercial property is a slightly bigger game. Although it is possible to invest in smaller shops and retail areas that are less expensive than residential housing, commercial entities like industrial areas, shopping blocks and shopping centres require a bigger budget. The cost may deter some, but many developers find it more profitable to focus on a handful of bigger properties rather than hundreds of smaller ones.



The lease



Here’s where commercial property becomes increasingly enticing for the property investor. Residential tenancies are typically shorter than commercial ones and, as a result, come with a great deal more uncertainty as to whether you’ll always have a tenant. For example, over a period of ten years, where a commercial landlord will deal with just one tenant, a residential landlord may deal with six, seven, eight or nine. And as the residential tenants overlap, there’s bound to be some substantial income lost – not to mention the time and money spent in vetting and advertising to prospective tenants.



Buying homes in a sought-after area may minimise this problem, but there’s no getting away from the fact that residential property can be a more short-term, stressful investment than its commercial counterpart.

 Many investors may understandably baulk at having to source an interested business tenant for their property, but often securing a commercial mortgage happens once the investor has received assurances that a company will rent from the property. 



The problems



When it comes to any problems in the property, commercial investors are much better off than residential landlords because they’re not responsible for paying maintenance costs.



Investors in residential properties frequently find their profits eaten up as they have to foot the bill for a broken boiler, leaking bath or a damp problem. However, a commercial tenant will have it written in their contract that they have to pay for any essential maintenance. As a result, you’re far more likely to have a high-quality property to sell once you decide you don’t want the property any more. 



Both in regards to cost and hassle, it’s easy to see why commercial property is popular with investors and viewed as a slightly more dependable investment. What do you think – does the booming rental market make residential property more attractive? Or is commercial property the natural upwards progression for an ambitious investor? 

About the author

With nearly a decade of experience in arranging commercial mortgages, first with Barclays and then as a consultant with The Money Partnership, Ben Lloyd now heads Pure Commercial Finance, where he is involved in brokering finance for businesses, property developers and property investors. When not spending his time arranging bridging loans and commercial mortgages, Ben enjoys Rugby, Football, Golf and Skiing.