Commercial Vs ResidentialWhen first investing in commercial property, a lot of people look to compare it against residential property investment because that is what they understand. The following will help you gain a better understanding about commercial investments as well as how they compare to residential. Rate of returnCommercial rate of returns are usually higher due to the higher levels of risk. The reason returns are greater for commercial is to account for the added risk. LeasesThere are several key aspects to a commercial lease. a) They are usually for a set period of time. For example 3 years. b) They will also have “Rights of renewal”, e.g. 2 x 3 years following the initial term. This is where the tenant has the right to renew the lease for a further term as dictated by the lease agreement. Under normal circumstances, the landlord cannot deny the renewal of the lease. c) Rent reviews are built into the lease and will occur at set times during the lease period. These can be set increases, inflation adjusted increases or market adjusted increases. Vacancy risk There is a greater risk with commercial buildings that when a tenant leaves that it may be vacant for a longer period of time than residential property. Specialised buildings could be vacant for a year or more as agents seek to find a tenant who has needs suited to your building. This is one of the reasons why you see a greater return for commercial buildings. B U Y E R C H E C K L I S T
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