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Residential tenant-Commercial tenant

Residential tenant-Commercial Tenant

Residential tenant-Commercial Tenant

We service both types of real estate investors, residential tenant-commercial tenant. Consequently, our initial discussion with the wondering client tends to include the question “should I buy a commercial or residential investment property?

A residential tenant is a person.

A commercial tenant is a transaction.

As a result of being a residential landlord, you are dealing with people, subjectivity, emotions and behaviours. Say the the rent falls behind, the steps you can take are governed by strict and overriding rules established by the NSW Fair Trading Office. You can not consequently evict your residential tenant! Rather, you have to wait for the tenant to fall behind by 2 weeks before you commence proceedings! You simply cannot evict the tenant.

If the tenant misuses your property, the remedy can only be in accordance with the NSW Fair Trading Office. This is not made any easier if your opinion differs from what your tenant considers to be fair and equitable. Conclusion? A visit to the NSW Tenancy Tribunal usually by your property manager is the first step in an otherwise arduous process.

If the above mentioned residential scenario happens to be in a commercial property, all you have to do is follow the agreed terms and conditions. If the rent is not paid on time, the lease stipulates the necessary steps you can take to remedy the situation.

Horses for courses!

Example?
A penalty interest rate automatically applies to the late rental amount.

Another example?
If the rent remains unpaid for a certain period of time, call a locksmith and change the locks ensuring the lessee’s fittings, furniture etc are in the premises because you can then sell them to recover the outstanding rent.

Can you exercise this remedial action in a residential tenancy? Not on your life.

Unlike a residential lease, a commercial tenancy includes a bank guarantee covering the rent and other agreed costs for a certain period. In addition, if the property is not kept up to the agreed standard, again the lease will dictate the steps available to you to rectify the problem. In both scenarios, there are no tribunals!

The tenant is responsible for the maintenance of your property in almost all leases. This is another fundamental point of difference, but that is another subject.

Horses for courses!

The length of a typical residential tenancy tends to be for 6 months and in some cases up to 12 months.

The lease by a commercial tenant on the other hand would normally evolve over a 3 year term and up to 10 years.

Why?
Because a commercial tenant needs the stability and location permanency to operate from.

Hence your lender will extend their support on the strength of your lease. The longer it is, the more secure you are to your lender.

Noteworthy, a commercial property owner must take into the equation, the not attractive characteristics of a lessee.

A lender most of all lends more for a residential purchase than a commercial one by e.g. 30%. Some lenders increase the interest rate for a commercial property loan by up to 1.5%.

Most noteworthy, while the vacancy rate is much lower for a residential property, the cash flow from a commercial property as a result of being vacant up to 9 months can be especially relevant to this important factor.

Another factor is if a commercial property is customised for a certain industry, it might be difficult to find immediately a tenant that can operate their business in your property.

SUMMARY –

Residential tenant-Commercial Tenant


COMMERCIAL

  • Tenants care about the upkeep of your property.
  • The lease would range from 3 to 10 years.
  • A lessee will attend to the upkeep of the property as they generate income from it.
  • Governments and authorities at large rarely meddle with the terms of the lease.
  • Banks tend to lend 50-70% of the purchase price
  • A landlord stretches the vacancy rate till they find a new lessee.

RESIDENTIAL

  • Some tenants do not maintain your property.
  • Tenancies tend to vary between 6 and 12 months.
  • Your tenant can ask you to send a handyman ($65+ per hour) to change a bulb.
  • The tenant’s rights of occupancy are almost favoured by the rules and regulations.
  • Banks (nowadays) lend up to 80% (used to be 100%) of the purchase price.
  • Low vacancy rate.

In conclusion to the question of “Residential tenant-Commercial Tenant”, it seems like it is dependent on your objectives and financial disposition.