Why You Should Invest Commercially Instead of in the Residential Sector

Posted by on Jun 27, 2016 in Blog - Commercial Investment Properties | 0 comments

Why You Should Invest Commercially Instead of in the Residential Sector

Why You Should Invest Commercially Instead of in the Residential Sector

Every property investor eventually tackles the same question – should I put my money in a commercial building or on the residential side? It can be easy to opt for the residential niche, after all you probably know a handful of people that are looking for a new place to live right at this moment. What we recommend to our clients however is resisting the urge to go the easy route and instead opt for the long-term benefits of commercial investing. Here’s why:

Longer Lease Terms

In the residential market a lease is typically 12 months although some property owners offer them as low as 6 or even 3 months. This leads to a lot of turnover and down time – both for finding new tenants and repairing the damages the previous ones caused. In the commercial industry, it wouldn’t make sense for a business to stick for as little as a year. In fact, location is one of the biggest strong points a business has as their customer knows exactly where to find them. Therefore you can usually lock in a commercial tenant for 3-5 years or longer in a deal that benefits both sides.

Commercial Rent Can Increase Significantly

The commercial lease will traditionally dictate the length of the tenant occupying the building but it doesn’t always determine the price. Commercial property owners can offer new tenants free or discounted rent the first few months as they prepare the building and get their feet wet. In return, they may sign a ‘ratchet clause’ in which rent will then rise annually. If a business becomes successful they will want to stay at their location and should be willing (and able) to pay for that opportunity. Residential agreements are usually ‘set in stone’ by rental laws.

The Tenant Pays to Improve the Condition of the Building

You would almost never expect a residential tenant to improve the condition of the building (installing hardwood floors, bathroom renovations, etc.) on their own dime even if it improves their own quality of living. In a commercial setting customer comfort is key however and building improvements have a significant ROI in improved sales. The tenant is responsible for these upgrades and it’s not like they take them with if they leave (although they may have rights to). You can now increase your rent to the next tenant basically for free.

Commercial Tenants Generally Treat Property Better

We’ve all heard of people that apparently have no problem living essentially in squalor. Some people are naturally messy and destructive or smoke and have pets even though it’s against the rental terms. You might recoup the residential security deposit but the cost to return the property to liveable (and rentable) conditions might be 5-10X that. Commercial tenants know that no customer is going to want to do business in a dump. In fact, they might have a cleaning crew or maintenance staff that keeps the building in pristine condition on literally a daily basis thus preserving your investment.

Something we might recommend to those new to investing is to try both the residential and commercial side of property ownership just to gain familiarity. The opportunities might be more abundant on the residential side (although not necessarily) but to a T almost all our clients say,so are the headaches.

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