Five reasons why serious property investors prefer commercial over residential: Chris Lang

Having been involved with both commercial and residential property over the years, it's always interesting to get some feedback directly from investors.

It is particularly interesting to hear from those who have made the transition from residential to commercial property.

Here are the reasons why commercial can be a better investment:

Reason #1: Longer leases

Quite often, residential tenancies will be on a month-by-month basis, maybe six months, sometimes for a year.

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 a 12-month lease early, they just need to find a suitable substitute tenant, and simply transfer the lease across to them.

This new tenant then becomes responsible for the rental for the remainder of the lease.

Commercial tenants are running a business from your property. And whenever they sell their business, they also require your approval to "assign" the lease.

But 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 true net rental return to you.

Reason #4: Commercial tenants operate a business

If the toilet stops working in an apartment, the tenant asks you to send round a plumber. But commercial tenants quickly attend to the problem themselves, so as not to disrupt their business.

Furthermore, the overall appearance of the property becomes a reflection on them.

Therefore, whether the lease requires it or not, most commercial tenants will regularly repair and repaint your 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 this 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?