Real Estates: Residential or Commercial Property?

Published on 17th July 2007

The choice to invest in residential or commercial property poses a dilemma to many investors. Investing in residential property such as flats and apartments or commercial property such as offices, shopping malls and restaurants calls for putting in mind the pros and cons of each with a view of making a wise decision and evading regret. It is important that an investor keeps the following in mind:

Capital

More capital is required for commercial property unlike residential property. Vacant land for commercial users for example costs almost twice the same sized residential plot. Besides this, some financial/mortgage institutions will give up to 90 percent mortgage in case of own occupation residential houses payable in up to 25 years, but a lesser percentage for income generating property which is paid back in a shorter period. For example, Kenya Savings and Loan Mortgage Company will give a maximum mortgage of 85 percent for purchase/construction of own occupation residential property in Nairobi, Mombasa, Kisumu, Nakuru, Thika, Eldoret and Nyeri with a repayment period of 25 years. For income generating property in the same areas, they will give a maximum of 70 percent with a repayment period of 10 years.

Location

Before deciding which type of property to invest in, one should look at the surrounding. If one wants to put up a house in the town centre, it would be more prudent to consider investing in commercial property. One also needs to be cautious when investing in a commercial property in a predominantly residential neighborhood. Putting up a commercial property in estates like Buruburu, South B, or Lavington in Kenya, calls for careful thought on the demand for such property. That is not to say however that commercial property will not do well in a residential zone. Statistics have shown that a few commercial properties will do well but when they increase; demand decreases. To avoid unnecessary expenses where one has to convert residential units to commercial units and vice versa, there is need to conduct a research and also consult real estate agents.

Lease Length

Tenants in residential units usually get leases of one to two years. The agreements have an exit clause of one month's notice meaning that either party can give the other one month notice to terminate tenancy. The case is however different when it comes to commercial properties. The legal position is to give leases of at least five years without any exit clause to avoid controlled tenancies. This means a commercial property tenant with a valid lease out to vacate premises before expiry of the lease is legally liable to pay the landlord the rent up to expiry of the lease. This is mainly done to give the tenant a definite period to do business and invest without the fear of having to be thrown out of the premises; at the same time assuring the landlord of a long term tenant, thereby planning ahead in terms of income projections.

The landlord may prefer this because once he builds and gets tenants; he will have long leases thereby creating an uninterrupted income over a long time. The tenant, on the other hand, may fear signing up long leases due to the unpredictable nature of business thereby avoid such premises.

Tenants 

It is easier to find tenants for residential houses than commercial houses. A residential house is likely to be vacant for say a month or two, while a commercial property may be vacant for as long as a year. Why? Because the qualities of a residential house such as a kitchen, living room, and bedroom among others are predetermined unlike for commercial property. For a residential house that takes up to 4 months or more without a tenant, one can add a new aspect such as car park, servant’s quarter, and enhanced security consequently attracting new tenants. In the case of residential, urban residential developments are in short supply and if a house is built in the right location and priced correctly, it will almost certainly have a tenant

On the other hand, different commercial property tenants are looking for different things. For example, one may be looking for enough space for a shopping mall, and another a small space just enough for a barber shop, another an entire floor or two for a restaurant, among others. The real estate investor may not be willing to convert his property to accommodate certain types of businesses; due to the location of the premises or other tenants in the building. This is likely to minimize the number of interested tenants making the property take long before getting a tenant.  

Maintenance and Property Improvement/Management 

Commercial property will need huge capital outlays to ensure the building is properly maintained. Since most commercial premises are offices, the clients will require that the properties are well maintained and have an aesthetic appeal. Some commercial property tenants will be keen on maintaining and even improving property such as fixing a leaking roof, a broken window, or even changing doors. In other instances, the landlord may hire real estate agents to manage the property. For residential property, tenants have minimal interest in maintaining or improving the property. Incase of any minor problem, they are likely to contact the landlord to fix it. This means that property tenants are likely to involve the landlord all the time.

Conclusion 

It is therefore important that a first time real estate investor studies the market well before pumping money into an investment. Where necessary, real estate agents and successful real estate investors should be consulted to help make wise decisions.


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