Commercial vs Residential Property Investment

What are the essential differences between residential and commercial property and which makes the best investment?

When you invest in residential property you are essentially dealing with people.
When the rent is late, you have to deal with a person – the tenant. If you feel the property is not being looked after properly, you will have to deal with people who may have a different opinion from you.

With commercial property, you are essentially dealing with contracts. If the rent is not paid on time, then the contract (lease agreement) stipulates a series of remedies that the landlord can take. If the property is not kept up to a certain standard, then the contract may stipulate that you can send in a commercial cleaner and send the bill to the tenant.

Generally, governments around the world have countless rules governing the renting of property to residential tenants, which override anything that you may put in your rental agreement. For example, in the UK, if a tenant is behind in their rent, you cannot just evict them. There are all sort of protections in place so that the tenants will not be exploited. You have to allow them to fall behind in rent for at least 30 days before you can start eviction proceedings.

With commercial property, what is in the lease contract is generally what goes. Many commercial leases have a clause in them that stipulates that if the rent if late by more than a week, then penalty interest will be applied to the amount of rent outstanding. If the tenant still has not paid the rent a certain period of time thereafter, then you have the right not only to change the locks and take your premises back, but also to seize all the tenant’s fittings, furniture and equipment on the premises, and to sell them to recover the rent owing. Your rights as a commercial landlord are far stronger than those as a residential landlord.

With commercial property, the tenants usually derive their income at your premises. Therefore they have a vested interest in keeping your property in good condition. With residential tenants, there is not the same drive to maintain your property, let alone improve it. With my commercial property, I spent thousands of pounds changing the business from a men’s hairdressers (which it had been for the previous 30 years) – into a real estate business. In fact, for the first couple of years, we often had men coming to the property and looking inside expecting to have their haircut.

With a commercial lease, the tenants often paint their premises every couple of years so that it will be attractive to customers. In fact, in a commercial property, the tenant is responsible for whatever maintenance repairs occur. So if there is a plumbing problem in a commercial property, it is up to the tenant to bring in his own plumber and to be responsible for whatever bills are presented to him. In a residential property, the tenant is entitled to call the landlord or the management company – they are compelled by law to fix whatever repairs are necessary.

Another fundamental difference between residential and commercial property concerns the typical length of the lease. With residential properties it can be on a month-to-month basis, but is rarely longer than one year. Commercial properties, on the other hand, are generally leased for many years at a time. From the tenant’s perspective, it gives their company or business the security of the same premises to work out of. Banks like long-term leases as well: the longer and stronger the lease, the more willing they are to lend money on the property.

In some countries a tenant cannot rent the premises with a lease that is under 5 years. There is an upside to this and a downside to this. The upside is that his business is secure in that location for at least 5 years. He cannot be asked to move. The downside is that if times are bad, he might be able to pay his rent and he has no wiggle room to get out of that lease. So in the end he possibly could lose everything. He could lose whatever deposits he has put down, he could lose his furnishings, his equipment. He could theoretically lose the essence of his business.

So far, you can see there are a lot of advantages of commercial properties over residential ones.

Let’s summarise the main categories of commercial property:

1. Retail: shops or any building where passing trade or the general public are invited
2. Office: commonly found with retail or alone, and often above the retail areas on the ground floor
3. Industrial: places where things are manufactured or services provided – but not necessarily where the general public are walking past.

Commercial property is much more specialised than residential and it may be more difficult to find a tenant in the area of specialisation catered to by your building.

Typically banks will lend you up to 80% of the value of the property on a residential investment. However, with commercial property usually the maximum is about 60%.

The biggest advantage of residential property over commercial comes when your property is empty. If you have a house where the tenants have just left, if you have bought it in a good location and the market is reasonably active, then you should be able to find tenants quite quickly. Generally even in a slow market, the only reason why a residential property sits empty for a long time is because of the rental price. If you drop your rent by 10% or more, you will usually get a tenant. However, this downturn economy has vastly affected both residential and commercial properties. Workers who have been made redundant find that they cannot pay the rent. Many commercial properties are suffering because their tenants have been forced out of business.

With residential property, if your tenant has been laid off or fired, it may take you months to be able to evict him let alone find another tenant. In a commercial property, you are entitled to keep his deposits, fittings, equipment and furnishings, but that still doesn’t give you an income for that property. And right now there are many commercial properties that are going bankrupt. So my best advice is that in this downturn economy, that while there may be numerous opportunities for investment, be aware that there are just as many situations where you could lose a great deal of money.

Let’s look at commercial property that has been empty for 3 months or 3 years, then the problem may not be because the rent is too high. Even if you were to slash it in half you still may not find a tenant.

The reason for this is simple. Just about any residential property on the market has all that is required for someone to live in it. However, when it comes to commercial property, the requirements vary hugely from tenant to tenant. For example, when a dog food cannery becomes vacant, it may not be simply a matter of reducing the rent to find a tenant. No matter how much you drop the rent, no photographer looking for a studio is likely to settle for the dog food cannery. No shoe shop that relies on passing foot trade will want the top floor in an office tower, no matter how good the view or how reasonable the rental.

To summarise the differences between residential and commercial property:
Residential
Tenants have little interest in maintaining or improving your property
Leases tend to be short
Tenants contact the landlord for minor problems
Governments tend to legislate to protect tenants rights
Banks lend up to 80% of the value
If the property is empty, it is usually easy to find a new tenant
You deal with people
Commercial
Tenants have a strong vested interest in the upkeep of your property
Leases tend to be long
Tenants tend to fix minor problems
Governments tend to leave you alone
Banks will lend only 50-60%
The appraised value when tenanted may be 2 or 3 times the value when empty
If the property is empty, it may be difficult to find a new tenant
You deal with contracts, not people

If you were coming to me for property investment advice and you didn’t know which would be better for you: to buy a house or to buy a piece of commercial property. The first thing I would say to you is: research, research, research commercial property. Find out everything you possibly can about being a landlord, about tenancy agreements, about your areas of responsibility, the tenant’s areas of responsibility, and when you have spoken to a number of commercial property landlords, and gotten to understand the business really really well, then I would look for a group of investors who would go in on a building with you.

I would also look for a syndicate – you would be just a small part of that syndicate. Your financial obligation would be very small in comparison if you had just gone into it yourself or with one or two other people. A syndicate usually implies a large group of investors. The upside is that you don’t have to have much of a cash outlay if you invest with a syndicate. The downside is that you don’t make as much money if you invest with a syndicate. But your risks are greatly reduced, which is why people have a tendency to look for syndicates. When you have a syndicate investing in residential property, a lot has been written about landlords – that the landlord or landlords plural, are just soulless people out to gouge as much money out of their tenants as possible, making the fewest number of repairs they can get away with. The laws governing commercial property makes that condition less likely – mainly because most of what we are talking about is the tenant’s responsibility.

Is it too late to buy Gold?

Is Gold Due for a Correction and is it a good time to buy now?

I have been recommending physical gold for the last three years to all my clients. Those who invested and took my advice are of course very pleased with their purchase. However, there are new clients coming to me know who are very anxious about the state of the world economy and the continuing uncertainty and wish to know whether it’s too late to invest in gold.

It’s a good question. Let’s take a brief look at the major moves in gold over the last 18 months or so. One of the key high points was in March 2008 when gold went over USD$1000 for the first time ever. At that point it looked as though it would continue to rise and go through the roof. However, much to the chagrin of many gold bugs, only two months later, gold was at just USD$870. And for the next five months, gold continued to drop and by October 2008 it was below USD$715.

It wasn’t until February 2009 – just under a year later, that gold managed to go above USD$1000 once again. So those who bought gold at its high in March 2008 had been kicking themselves for nearly a year. Many were very concerned that perhaps gold would never go above $1000 an ounce ever again. However, I did try to allay their fears by showing them that the world economy was far from certain and that for sure, it would come back again and show its true colours.

However, gold is not for the faint-hearted. It is not something that you can watch every day and worry about. This is not the idea of owning gold. It is largely for insurance purposes and could just make the difference between being able to pay your bills and buy food for the month if the world economy got into severe difficulties. It is always best to be prepared for the worst and then hope for the best. Because only two months after gold hit $1000 in February, it went below $880 in April. In September 2009 gold has started to rise parabolically – going over $1000 and in November to $1150 and rising…..

So should you buy now?
I advise all my clients to buy incrementally so that if you do happen to buy at the high point, you won’t feel too bad if it drops subsequently as you will still have funds to buy in the dips. However, with governments around the world buying gold, banks buying gold and more and more private individuals investing in gold, you can be sure that the price eventually will soar. It’s just a question of when. The UK has never sold so many gold coins to private individuals ever before. In the East, the public are more accustomed to buying gold. However, with Harrods offering gold to the public in the UK, the West is catching up.

If you do not have any physical gold in your portfolio I would strongly suggest that you seriously consider buying some. This is a very difficult time to decide whether to buy or wait. The price may just to up and up, or it may drop back before rising again. In my opinion, probability is on the side of it going up overall with a few small dips in between.

If you have already bought your gold, then just sit and wait!

Gold Hits New Highs

So just what is happening around the world? Gold hit new highs of $1123 per ounce this week, the US dollar came under severe pressure and yet stocks continue to rise. Some call this the “jobless recovery” and cannot understand what the media mean by “green shoots of recovery.” Others are convinced that we will soon be out of global recession. So whom can you believe and what is the truth behind all the stories that we hear?

In my view, I tend to agree with those pundits (who are in the minority) who say that this recession/depression has a long way to go. The fact that millions of dollars have been thrown at our banking institutions around the world and now that some are showing positive balance sheets and are paying themselves record-breaking bonuses once again beggars belief. Do we have to go through the same scenario once again – and maybe the second time it will be even more painful? Or are there some serious politicians and leaders out there who can see alternative solutions that might actually turn this impending depression around?

This week I was heartened to see that the Wall Street Journal reported that “Merkel (German Chancellor) Vows to Cut Taxes Despite Rising Job Losses.” This has made her very unpopular with some and she has received much criticism for her approach. In fact, this could be the best strategy out there right now. Cutting taxes is a very intelligent thing to do in order to deal with the current economic uncertainty. By cutting taxes more monies will be in the hands of the consumers who may just spend more and thus boost the economy. Cutting taxes is also a great way to encourage small businesses to hire people which could also be the answer to long-term job creation. Yet Merkel is being criticised for this longer-term stimulus proposal. She seems to be the first world leader who is willing to go against the tide and propose a new strategy that is constructive and promises to bring Germany out of recession sooner than many other countries. If she actually implements this policy, then Germany may be a country to keep an eye on for investing your money for the future.

I predicted that gold would soar in value as it is doing, (against the opinions of many stalwart investment analysts) and I think it still has a long way to go. So don’t be kicking yourself thinking that you should have bought earlier – try to buy when it goes down a little and buy incrementally so that you can take advantage of the dips when they occur.

We live in interesting times – the main thing is to try to protect yourself and your family first, then adjust your mindset so that you are aware of the possible outcomes around you and if necessary change your strategy to suit the prevailing conditions.