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Posted about 9 years ago

Investing in Rental Property? Weigh the Options First

Selling Commercial Property

Image Via: Realtytoday.com

For people looking to generate a source of extra income, investing in real estate can be the best thing to do. Whether you buy a plot of land or a rental property, you are sure to make some profit in the long run.

If you are looking for immediate returns, rental property is your best bet. But should you go for residential property or commercial property? There are pros and cons to investing in either type of rental property and you need to consider several things before taking the plunge.

Here are some factors to consider before you decide between residential and commercial property.

Size of Investment and Financing Options

First things first- you need to take into consideration how much you’re willing to invest in property. Commercial properties require investing a huge amount of money as compared to residential properties. So if you only have a decent amount of dough to invest, you should think of investing in residential property.

If you’re planning to take a loan, know that loans for commercial and residential properties are very different to each other. Commercial properties are considered to be risky, so you will be required to pay at least 20% of the price as down payment. The payout term for a commercial property loan is also shorter.

If you can’t think of investing in a commercial property, check out great mortgage rates from Newcastle Permanent and invest in a residential property of your choice.

Amount of Income Generated

Rental property, whether commercial or residential, will generate a steady stream of income when you have tenants occupying the property. But a commercial property will generate a far higher amount of rental income as compared to a residential property of the same size and in the same area.

Moreover, as there is no rent control, you'll be able to charge a tenant occupying your commercial property whatever amount the market permits.

Ease of Finding Tenants

Commercial properties are built to serve a limited purpose. Depending on the location and design of the property, not many tenants may be attracted to your office, warehouse, or industrial building. As such, commercial properties are likely to stay un-tenanted for long periods of time.

A residential property too, will appeal only to certain tenants depending on its type. However, finding a tenant will be relatively easy if you invest in a residential property that will appeal to a wide range of potential tenants. For instance, a medium-sized city apartment would attract more tenants than a large family home on the outskirts of the city.

Quality of Tenants

Commercial properties are bound to attract better tenants in terms of financial stability. If you're lucky to find a large corporate or a government tenant (referred to as a 'blue chip' tenant) for your property, you won't have to worry about them defaulting on the rent at all.

Even if you have a small business owner for a tenant, you'll have no reason to fret. Small business owners aim to protect their livelihood, so you are sure to receive timely rent from them. Further to this, they also take pride in their business and you can expect them to keep their interactions with you professional.

Duration of Lease

Residential property tenants will always be on the lookout for better homes with lesser rent. You can’t expect a tenant to stay put in your residential property for a long time.

Conversely, commercial property tenants will be willing to sign 5-10 year leases. And if you land a blue chip tenant, they might even sign a 20 or 50 year lease!

Maintenance of Property

Landlords are supposed to bear all renovation and maintenance charges related to their residential property. At the same time, a tenant may or may not take care of your residential property which could lead to further expenses in the future.

When it comes to commercial property, the lessee has to pay the maintenance and repair costs. As such, he will see to it that your property is well-cared for. The leaseholder will also keep the property well-maintained so as to attract and impress as many customers as possible. So whatever work is carried out on your property will be good without being a burden to you.

If you intend to invest in multiple properties, note that maintaining and managing a dozen residential properties in various places will be tough. Managing more than a couple of commercial properties would be relatively simple, especially if you invest in shops or offices in the same shopping center.

Value Appreciation

Land appreciates in value while buildings depreciate. As such, if you invest in residential property that has a higher proportion of land, you can expect the prices to increase greatly in the future. On the other hand, capital growth potential is lower for commercial properties.

On the flip side, your residential property may not appreciate in value if it is uncared for or if your tenants leave behind a damaged house. As tenants occupying a commercial space will usually take care of your property, you are likely to profit should you choose to sell it.

Conclusion

Now that you know the factors you need to consider before making an investment in rental property, you'll be able to choose between residential and commercial property wisely.

Whether you plan to flip the property or intend to hold it for long and become a landlord, you are sure to make a profit.

Happy investing!


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