Is commercial property worth more than residential? Kent Property Witness offer RICS expert witness surveyor services for Tonbridge and Kent. Property investors need to understand the value for commercial and residential property. We look at the differences and how to buy residential or commercial property.

Real estate investments are a great way to raise rental income, but the residential sector spans commercial and residential properties. Both have pros and cons, but you should first understand the difference between them. 

Most people want to invest in commercial or domestic property, but it is a challenging expense and should be calculated beforehand. Keep reading this article if you're looking for quality advice on commercial investing regulations and what is the best path for you. 

What is the difference between commercial and residential real estate?

However, it should be noted that house prices continue to rise as more people are renting homes. Residential properties are always in high demand, but the area in which you rent can make a high difference.Any maintenance issues future tenants will encounter typically mean the landlord is exempt from paying for commercial property. 

The tenant's responsibility for property expenses and maintenance problems (electricity, gas, etc.) is entirely their own, whereas, with residential properties, the tenant pays. Many commercial properties work on triple net leases, meaning the tenant handles most of the property expenses

 This can be paid for as a service charge or organise the maintenance themselves, but the landlord only has to maintain the mortgage, saving you money in the long run. 

This is perhaps the most popular benefit of commercial investments. If they are not arranged on a triple net lease, a double net lease will be arranged, meaning the allocation of costs between tenant and landlord is sorted out for the particular situation.

Strip malls, as one example, typically carry multiple types of net leases, but triple net are ideal and make commercial property investments stand out from their residential counterparts. 

HOW DO YOU VALUE A HOUSE IN A DIVORCE?

How to value commercial property

Commercial property investment comes with risks, with the purchase price fluctuating, so the question is, how are they valued?

Commercial properties are valued on their location and size, with each county and high street having a set value for pound per square foot for that given building. Calculating a commercial property value involves zones. For example, the first 20ft is typically the highest price point and will be the customer entrance, with Zone B and C being half the price of the previous zone.

Underground storage spaces such as basements are typically between £1 and £2 per square foot. Commercial house prices vary depending on where you are in the country, much more so than the residential sector. Most investors will calculate their tenant rent from the square footage of their property.

Professional relationships between commercial landlords and tenants are aware of the ever-changing nature of tenant rates and how the commercial market can fluctuate. Due to this, tenant rates change every few years.

However, when working with a knowledgeable broker, you can use the current owner's income to determine the property's price point. This will help set the price where an investor can earn the prevailing cap rate, although this changes from offices, retail, construction and industrial properties. 

How to buy commercial property

Is Commercial Property More Expensive?

Many people who are new to investing believe commercial property to be more challenging to manage or more expensive overall, but that isn't always the case. Commercial properties are in high demand, with financing options available for landlords who want to find tenants and earn more capital. Compared to residential ones, commercial properties are becoming more and more popular.

With tenants being on longer leases, you are more likely to make your return on investment with ease, especially when investing in successful businesses. However, you would be wise to arrange a valuation on the property before committing to any decisions.

Ownership costs are the only prices, as other costs can include:

• VAT (this is applicable on some properties where sellers have made an option to tax)
• Accountancy, surveying and legal advice
• Stamp Duty Land Tax on properties valued at £150,000 and higher.
• Fees required for commercial mortgage
• Refurbishment and fit-out costs

Of course, commercial property owners should also be aware of insurance, repairs, maintenance and services (fire alarms, cleaning and security) as these can also raise the price. Commercial real estate landlords should also prepare for occasional large maintenance bills. While property management companies may tackle these tasks for you, 5-10% of the rental revenues will be charged for the repairs to keep the building safe.

Landlords commonly choose to take maintenance into their own hands, meaning you can reduce the ongoing costs significantly when doing these jobs. Depending on the current economy, you can make an annual return between 6% and 12% when investing in commercial property, which is significantly higher than residential properties.