The Profit Bricks And Mortar
The real estate universe almost all the time is summarized as two things. Investing in commercial properties or residential properties.
It is very common that investors who buy and sell residential property may think that they have the knowledge and skills to enter the commercial real estate market. However they do not know the significant differences between the two markets.
If the real estate investor does not have an optimal understanding of property valuation. The structure of the rent and the various commercial real estate segments, it is possible that the only thing that comes up is a headache.
Therefore, we have summarised in this article some key factors that every residential investor should take into account before joining the world of commercial real estate. We also outline the benefits and disadvantages of both models and how to optimise your investment revenue in Birmingham.
Pros and Cons When Investing in Residential Property
Something significant that all good asset management has is diversification. The old saying “do not put all the eggs in the same basket” confirms this strategy.
Many young investors are born with the brick and mortar investment concept in mind. Consequently there are more and more landlords and property investors than ever before. This means that a large part of the assets within an individual’s investment portfolio are already in residential real estate. Is it still profitable to invest more in residential real estate? What are the pros and cons, what are the alternatives?
What are the advantages of investing in residential real estate?
We must understand that residential real estate all kinds of properties (apartments, houses, holiday homes) serve as the main dwelling of a family group. This property always offers you a few basic certainties:
- The population continues to grow
- The number of households increase and is made up of fewer and fewer people
- Space is increasingly scarce
- The urban policy will be increasingly strict and more concentrated
- The ideal protection against the exchange risk of local currencies
- The permanent value increase
If we look at the residential real estate market in recent years, we see steady growth in the prices of family homes such as houses and apartments. Only the country houses or holiday homes have a lower growth.
Commercial or Residential
Residential property is more stable, and commercial property is more fluctuating because it is more susceptible to market changes. When the market goes into crisis, the first ones to suffer are commercial properties. Especially if they are properties that are below £300,000. It is because these are usually small businesses that are renting. In times of crisis. Small businesses are the first to be affected. The cheaper the commercial property, the more susceptible to changes. On the other hand, in residential properties, properties under £300,000 suffer less. It is because generally, the rents of this type of property go up in prices in times of crisis.
For residential properties, it is much easier to obtain bank financing. However, with commercial properties, it is more difficult unless they are very high amounts. Also, commercial property includes real estate such as the land, the building and maybe a retail office or warehouse centre. Therefore making the commercial investment similar to the purchase of a business opportunity. The financing is much more complicated since the banks are going to lend against guarantees and the best guarantee for the bank is the real estate. However, you can always opt for special financing, whether granted by the owners of the property or private lenders who offer such lending for commercial property.
Basic Rules of Investing In Birmingham
This confirms another basic rule when investing in the real estate sector;
“It is always better to invest in cheaper properties. The rental yield is relatively higher, more tenants can rent. Also, there is a greater potential for capital gains, if the property is in the right location. “
In summary, there are sufficient benefits to consider additional investment in the residential real estate sector. In the coming years there will be enough tenants. Furthermore also adequate protection of the investors capital against inflation, supported by a lack of new housing supply.
What are the disadvantages of investing in residential real estate or property?
The reason why many landlords and investors flee from the classic residential property market is that the current law protects the tenant. Consequently not the owner and ensures that the owner has little control over their property.
It is not possible to get a tenant evicted without the intervention of solicitors or the courts. Even if the tenant chooses not to pay or damages the property. This is an administrative burden, and it can take a long time for the property to be returned with vacant possession to the landlord or restored back to its original state for renting or selling again.
What Makes A Good Tenant
Many of the “good tenants” disappear from the rental market because usually those who pay on time and leave their property in good condition. This is because almost always have a good income. With an adequate loan, these tenants will be able to buy their own property within a short period of time. Therefore, they stop renting their house after a particular time. Then, there are tenants who have problems such as delaying and being late in rent payments, due to lower incomes and rising living costs.
Residential real estate forms an excellent solution if you find good tenants. It is still an excellent investment in the long term since the demand for quality housing is required in the UK.
The Problems With Investing
Still there are several possible problems with investing in residential real estate. A bad tenant can turn your property investment into a nightmare. The laws that protect the tenant also make it difficult to change the rent during a tenancy without providing sufficient notice. Also evicting tenants can be costly and with new legislation being introduced. This means tenants that are dishonest and deceitful could be making false claims against landlords.
For these reasons you should only choose this traditional investment in residential property. If you are willing to invest the time and capital. However if you don’t have the time then you must employ a professional letting agent or management company. This will ensure you minimise on costs and maximise on returns.
Pros and Cons When Investing in Commercial Property
Like many hot markets in real estate investment, the debate whether investing in commercial or residential market is still dividing investors. Advocates of residential investment say it is the least risky option. However those in favour of commercial property could argue that commercial property investment is safer due to its cash flow potential.
Smart investors, of course, do not choose between the two options. They must analyse and calculate how their investments fit into their portfolio.
What are the advantages of investing in commercial real estate or property?
- Longer leases: While a residential lease can end every 6 to 12 months, a commercial lease can last between 1 to 10 years and longer. Tenants also tend to stay longer especially when capital has been invested in personalising the commercial premises and the business has established its location within their market place.
- There are no fees and other expenses: Unlike residential properties, where landlords are responsible for the repairs they pay, such as internal and external works, commercial tenants pay these expenses for you with a full repairing and insurance lease also known as a FRI lease.
- Smaller deposits: Commercial properties are generally lower priced compared to residential properties. Therefore, you need a lower capital investment. For example, a parking lot can cost £80,000 instead of £400,000 for a decent size house in the Midlands. Investment in commercial real estate could be a great way to enter the market faster compared to saving for a residential real estate investment.
What are the disadvantages of investing in commercial real estate or property?
While commercial property looks attractive on paper, there are potential risks that must be taken into account before investing.
- Commercial properties are sensitive to economic conditions: When the economy is strong, businesses prosper and the demand for commercial properties in general increases. However, when there is an economic crisis, the need for commercial premises usually falls.
- It takes longer to find a tenant once there is a vacancy: While commercial properties attract long-term leases. This typically takes three to five years or more. Also it is important to note that it may take longer to find a tenant. Seldom It is rare to have commercial properties with extended vacancies. This means, you must cover all the expenses during this period.
- Changes in the infrastructure of the area can be harmful. While significant changes in the infrastructure of the area may attract commercial investments. This may also detract tenants away from existing areas and larger commercial premises. Consequently this could result in a constant vacant property for many years.
- Values may plummet. The value of commercial properties is closely correlated with the lease of the property. If a commercial property becomes empty, or the contract is about to expire. This generally results in the value of the property is expected to fall. On the contrary, any fall in prices associated with residential properties is generally less dramatic. More often this usually occurs progressively over a more extended period.
Therefore, should you buy a commercial property or a residential property?
It depends on where you are now in your portfolio. If you are looking to diversify and want an injection of cash flow, a well-placed commercial property could be a good option. Just make sure you do it with due diligence and make sure you understand the risks involved.
Which One Is More Profitable?
Commercial real estate and property is an area of investment that is often overlooked. Many people even shy away from commercial real estate research, just because the subject intimidates them. This is unfortunate because commercial real estate property can be a huge source of cash flow. The main reason why many investors get involved with real estate in the first place.
Many of those who have challenged the world of commercial real estate have discovered that they can generate higher cash flow. Along with wealth through commercial real estate property than through any other real estate strategy. Also, investing in commercial real estate property is quite simple and easy to learn with an experienced agent on hand to walk you through the process.
Do not limit yourself because of your lack of knowledge, or fear that the investment is too significant for you. By learning the basics of commercial real estate, you can determine if this is an area that interests you and that it could work for you.
Reason why big investors invest in commercial real estate and property
Perhaps the main reason why people invest in commercial real estate is the opportunity to create wealth that it provides. A specific transaction in commercial real estate, as a general rule. This is more likely to produce more cash flow than in a residential property of the same or similar value.
Besides, there is a level of cash flow protection that commercial real estate offers that residential real estate does not. If you buy a single-family suburban house, then you will depend on the rent of that unit to produce cash flow. With commercial real estate, especially when multiple groups are involved, you can have one or two units unoccupied. This still, generate positive levels of cash flow, mixed use buildings offer diversification and entry for the non-commercial real estate property investor.
Types of commercial real estate investment
In a broad sense, commercial real estate is any property that is used to conduct business. Four of the most common types of commercial real estate are:
- The retail market comes in all shapes and sizes, ranging from regional shopping centres to local shopping centres to small plazas for the community. Small squares are where most investors take their first step in the retail market.
- Includes office warehouses, large industrial spaces, research and development parks, industrial parks and storage spaces. Specific industrial investments can be an excellent source of income if they have been properly acquired. One of the members of your team should be someone who is familiar with the industry that is being investigated and should be able to do inspections on the property and understands the local market supply and demand.
- : Office property may vary based on the size and height of the buildings, from high, medium and low and locality such as suburban or urban. A suburban office building or estate is generally considered to be more complex with several buildings and open spaces in between. Investing in urban or suburban offices can be a great way to start your investment since apart from cash flow, suburban office space also offers the ability to maintain large tracts of land for future development.
- (mixed use): Apartment buildings or housing blocks with retail space are perhaps the most popular investment option for beginners. Technically, any property that has more than six units is considered a commercial property for land tax. Residential apartments are always a necessity in society since there will still be a sector of the population that cannot, or will not, buy single-family homes. While apartment buildings also offer tremendous cash flow opportunities, other types of commercial property might fit better in your investment plan.
If you’re interested in commercial real estate, do not limit yourself to a single area unless you’ve researched several types of commercial real estate opportunities to see what might be the best option for you, make sure you take legal and professional advice from the experts.
Conclusion and final tips
Whilst comparisons are often used to determine the value of a single-family home, the ability to produce cash flow is a significant factor in determining the cost of the commercial property. Comparison work with residential properties is relatively easy. It is not difficult to compare houses in an area say Birmingham for example. It can be based on the recent sale price, comparable size, condition, type and year of construction. Websites such as Zoopla www.zoopla.co.uk and Rightmove www.rightmove.co.uk can help you. The search for commercial properties, however, is often more difficult to compare. Therefore, different criteria are applied to determine the real value of a commercial property.
Remember, you are not buying a house to live in, you are buying a business. Consequently a detailed analysis of the cash flows that the property can generate are an absolute necessity. Your accountants expertise is invaluable when buying any type of property or real estate. The ability of the property to make rental income is one of the most important criteria to consider. Other things you should think are the size, condition, and location of the building, the financial stability of the market in which you are looking to invest, the levels of competition involved and understanding supply and demand at both micro and macro levels.