The same questions are raised by Australian property investors when they consider moving from residential property to commercial property. Chris Lang, an advisor to commercial real estate investors, lists the following five very compelling reasons.
Reason 1: Longer tenure for tenants
In most cases, housing tenants are rented on a month-to-month basis, perhaps six months, and with luck, perhaps a year.
And commercial leases tend to be between three and five years, often longer. This means fewer lease changes and a more predictable revenue stream.
Reason 2: The landlord has more control
When a housing tenant wants to leave before their lease expires, they simply need to find a suitable replacement tenant and turn the lease over. From then on, the new tenant is responsible for the rent and for fulfilling the remaining term of the lease.
In turn, commercial tenants are engaged in business activities and when they sell the business they operate, they also need the landlord to agree to their lease.
Reason 3: No additional expenditure required
Typically, housing properties provide a 5 percent gross rental return. The landlord also pays municipal fees and taxes, insurance, maintenance, etc., which translates into a net return of about 2.5 to 3 percent at year-end.
Depending on its location and type, commercial properties can yield net rental returns of approximately 5 to 9 percent per year. This is because commercial tenants pay a variety of construction expenses on top of rent, giving the landlord a true net rental return.
Reason 4: Commercial tenants are responsible for maintaining the property
As you know, if there is a problem with a toilet in an apartment room, the tenant will ask the landlord to get a plumber to fix it. And it's up to commercial tenants to resolve such issues quickly so as not to disrupt their business.
In addition, commercial tenants are more concerned with the overall appearance of the property, and the property is kept in top condition by the commercial tenants.
As a result, most commercial tenants regularly maintain and repaint the property to maintain a good corporate image, whether or not the lease requires it.
Reason 5: More regularity in rent payments
Most rental housing is rented by individuals, so rent payments are often made in cash, personal cheques, or direct transfers, which often cannot be timed.
And commercial tenants are running a business where they see the monthly rent as a regular expense. Payments are generally set to be made on an automatic cycle, and this can also be specified in the term contract.
On the bottom line, residential housing investors often have to deal with different individuals. And commercial investors on the right commercial footing can begin to enjoy more predictable, long-term relationships with commercial tenants.
Doesn't that sound like a better arrangement? Especially when you are able to buy a small office for the same price as a two-bedroom apartment.