Before purchasing a new investment property, you should always consider the differences between residential and commercial property investments. Depending on your financial means, expectations and investment plan, you will have to decide which one can be more profitable for you. Most people will invest in residential properties, as this seems to be a safer endeavour requiring less money, however, if you have the means, commercial properties can be highly profitable. You should also consider that while traditional residential property investments might not have very high returns on your investment, repossessed or foreclosed properties, can bring you a net yield of up to 12-15%.
Houses of four units or less, to rent to private tenants are usually considered residential properties. You can invest in buy-to-let residential properties, which means that you'll get the rental yields every month, or purchase the property solely for future resale. Residential property investments vary from more traditional buy-to-let investments somewhere near your own home to investments in overseas properties, below market value properties or foreclosure properties. Commercial properties are for businesses, and include a variety of properties, from apartment blocks and office buildings to hotels, restaurants, warehouses and industrial buildings, just to name a few. Managing a relatively small residential property is obviously simpler than managing commercial properties, where you will often need a professional property management company to assist you.
While you will always need some knowledge of the property market and current conditions to make a successful investment, residential properties are simpler to research and value. It is relatively easy to compare different residential properties, their prices and investment potential in a given area. Commercial properties, however are often unique and require specialised knowledge to value accurately and to establish an investment plan.
Residential properties are generally regarded as low-risk investments. They also tend to cost much less than commercial properties and will thus be more affordable, especially if you've just started building up your investment portfolio. The relatively low risks and the low purchase price, however will also mean that your profits are lower, and your return on investment will come mainly from increases in capital value.
Commercial properties, on the other hand have higher risks, but also higher potential returns. The significantly higher prices will also mean, that for personal investors, only collective investment schemes are affordable for larger commercial property investments. The relative unpredictability of the commercial property market will also bring more risks. While residential property prices generally double every 10 years, this is not true for commercial properties. You can expect a net yield of up to 7-10% on commercial properties, which is higher than the net yield from traditional residential property investments, and a large part of your return on investment will be in the form of rental income.
A successful investment plan for both commercial and residential properties is to rent them out. Residential leases tend to be much shorter, usually around one year, and private tenants are often considered less reliable than businesses. Landlords will be liable to pay for repairs, which might incur unexpected additional costs. Commercial properties, on the other hand, are leased out for a longer time, 5-10 years is not uncommon, and the yearly increase in rental yields will be more significant. Businesses are also often considered to be more reliable tenants and commercial tenants are generally required to pay for repairs. You should also consider that while commercial properties can bring you a secure and high rental income, it is also much more difficult to find commercial tenants.
One investment plan is to rent out your investment property as detailed above. However, property flipping, or future resale can also be a profitable strategy with both kinds of investments. Residential property can be sold quite simply to another investor or somebody who intends to occupy the house, and as long as the property is in a good condition and in a well-chosen location, you should generally be able to sell it at a significantly higher price than its original purchase value. Commercial properties can bring huge profits, but the process of resale is more complicated. The property must be sold to another investor or investor group, and it should have a successful and profitable record, to be attractive to the buyer for investment purposes.
Belgrave Group is a UK-based property investment company. If you are looking for residential property investment opportunities, we have a wide range of high-yielding BMV and foreclosure properties in Detroit and Atlanta, so contact us, or sign up for our newsletter.
Why Invest in Property?
Types of Property Investments
Key Factors When Buying Investment Properties