It’s time to consider the pros and cons
IN the vast field of investment options, property investment is traditionally perceived as safe and long-term. However, within this sphere itself, there exist two different worlds: Residential and commercial property. While housing is a generally safe investment, wading into the commercial property market is a different ball game.
One major reason why shifting from buying residential to commercial properties is considered “upping your game” is that while investors are only allowed 70% financing for their third home loan onwards, there are no such regulations for commercial properties.
In fact, there are no policies to force lower financing margins whether it’s your first or 10th purchase. So, if you’ve gotten your feet wet with residential property investment and are looking for your third property, shifting to the commercial property sector means that you wouldn’t have to deal with higher down payments. Let’s explore the other key differences from an investor’s point of view.
Risk and return
In the residential world, demand and supply are the hero factors whereas in commercial property, risk fluctuates in tandem with the Malaysian economy.
Worsening conditions mean less purchasing power, leading to lower demand for retail spaces and ultimately, lower property value and rental rates. The adage that higher risks equal higher returns ring true here, as the lucrative prospects generally offset the gambles.
Less stress on tenant management
In this area, commercial property investment comes out as the champion by a long shot. For residential properties, furnishings and renovations are necessary features to rent out your unit in competitive areas.
On the other hand, commercial property tenants prefer their units bare, as they usually want to design and renovate them to their liking.
Subsequently, tenant management is much easier, in comparison. Residential property owners often face problems of frequent complaints and runaway tenants leaving outstanding rent and utilities.
Commercial property tenants conversely, generally give less problems and are more likely to adhere to the terms of tenancy agreements.
Additionally, if your commercial unit is in a competitive area, tenants would be lining up, should your existing tenant choose to terminate or not renew his tenancy, sparing you the hassle of finding new tenants.
Finally, as tenancy periods for commercial units are longer compared to residential ones, you get to save on agent commissions.
A lucrative market
In general, property prices have been surging recently, but in the commercial property sector, especially for prime areas, property value appreciation in general is much higher and faster. The reason for this is that for commercial properties, rental rates have a direct and more relevant impact on property value. This is opposed to the residential sector, where demand and supply play a bigger part. Additionally, rental rates for prime commercial units shoot up substantially higher and faster than for residential units.
It isn’t uncommon today for commercial unit rental rates in busy areas to revolve around the tens of thousands, many times more than a residential piece of the same square footage in the same area. The benefit here is two-fold: Higher property value and higher rental rates.
Financing your purchase
If you have ever taken a home loan, you would know that banks in general aren’t particular about the type of property they’re financing, be it apartments or houses.
However, when it comes to commercial property loans, banks become hyper-selective about the type of property and may give you a lower margin of finance and/or shorter loan tenure based on the type of property. If you do get offered a bum deal on a commercial property loan, shop around as other banks tend to like various types of commercial properties so you may find a better deal at another bank.
Conclusion
In summary, although you stand to gain in the commercial property market as opposed to residential units, there are many caveats you should look out for such as location, property type and economic conditions which have a much bigger impact on your investment.
View Loanstreet’s Loan Comparison Wizard to find the package and interest rates that best suit your needs for commercial property loans.
>> Loanstreet.com.my is a website enabling one to compare and apply for loans online.
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