RESIDENTIAL VS. COMMERCIAL PROPERTY INVESTMENT. WHAT’S BEST FOR YOU

Real estate can be a great investment. However, don’t forget to consider commercial real estate, alongside residential real estate when thinking of buying property as an investment. This article discusses the pros and cons of both residential and commercial properties.

With so many competitive property investment loans available, residential and commercial real estate investment can generate healthy returns with the right planning. When thinking of investing in real estate, many people limit themselves to residential properties. However, commercial properties can be a great investment vehicle as well. Both commercial and residential real estate offers pros and cons of investing in them.

Familiarity

This is the number one reason why many first-time investors will only consider residential real estate. There is almost no one who has never been through the process of renting a place – most people are quite familiar with the process of maintaining and leasing a home. On the other hand, commercial property may present you with elements you are unfamiliar with, especially if you are considering purchasing a store or factory that has already been outfitted.

Law

Quite frankly, the law is much more protective of commercial property owners than landlords who own residential property. In Canada, it can be quite difficult to evict a tenant, and there have been cases where delinquent tenants managed to stay in a house rent-free for over a year. On the other hand, contract law applies to commercial properties, which means that a commercial property owner can appeal to the law easily when required.

Financing

At the moment, Canada requires a 20% down payment for house buyers, but financing is becoming more difficult with the recent CMCH changes. A 30-35% down payment is required when purchasing a commercial property and financing is almost never CMCH approved, which means that you will need excellent credit rating and be willing to give a personal guarantee.

Vacancy risk

Another benefit of purchasing residential property is that the vacancy risk is quite low. The demand for rental property is usually very high in most major cities, and you will usually have a number of applicants vying to rent the same property. On the other hand, commercial real estate can lie empty for some time before you obtain a tenant. You need to be more proactive in advertising your place and “dressing it up” to look more attractive to prospective businesses.

However, once you obtain a tenant for a commercial property, they will almost never leave. A business has a lot of equipment and is known for its location, so most commercial property is leased out for a very long time. Residents, on the other hand, can simply pack up their belongings and move to another house, so the turnover of residential tenants is higher.

As you can see, commercial property can offer some significant advantages to the savvy investor. So if you are considering an investment in real estate, don’t limit yourself to only residential properties – you might just be able to find a commercial property more suited to your portfolio.