Residential tenant-Commercial Tenant
At Property Search 4U, we service both types of real estate buyers. Invariably, 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 residential landlord, you really are dealing with people, subjectivity, emotions and behaviours. For example, If the rent falls behind, the steps you can take are governed by strict and overriding rules established by the NSW Fair Trading Office. You simply cannot evict your residential tenant! As a matter of fact, you have to wait for the tenant to fall behind by two weeks before you commence proceedings! You simply cannot evict the tenant.
Similarly, if you think your property is being abused by the tenant, again you have to go about the remedial steps in accordance with the NSW Fair Trading Office. This is not made any easier if your opinion about the state of your property differs from what your tenant considers to be fair and equitable. Conclusion? A visit to the NSW Tenancy Tribunal usually by your property manager (for a fee of course) 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 find your copy of the executed lease and 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.
A penalty interest rate automatically applies to the late rental amount.
If the rent remains unpaid for a certain period of time (as stipulated in the lease), call your local friendly and willing locksmith and change the locks ensuring the lessee’s fittings, furniture, equipment and the coffee-making machine are all inside 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 with a residential tenant, the lease of a commercial tenant includes a bank (lessee’s) guarantee which covers the rent and all other agreed costs for periods up to 12 months and bob is your uncle! If the property is not kept up to the agreed (in the lease) standard, again the lease will dictate the steps available to you to rectify the problem. In both scenarios, there are no tribunals!
Maintenance of your property by the tenant is another fundamental point of difference, but that is another subject.
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.
Because a commercial tenant needs the stability and location permanency to operate from.
A side benefit for you the landlord is your lender will extend their financial support on the strength of your lease. The longer it is, the stronger is the lease and the more secure you are to your lender.
On the other side of the ledger, a commercial property owner must take into the equation, the not attractive characteristics of a lessee.
A commercial property is mostly a specialised real estate, consequently it is harder to find a tenant in that area of specialisation catered for by your property.
A bank or financial institution typically lends a buyer more for a residential purchase than a commercial one by 30% to 50%. Some lenders increase the interest rate for a commercial property loan by up to 1.5% compared to a residential investment property.
In regards to income/cash flow, the vacancy rate is much lower for a residential property by up to 9 months in certain markets and in certain times.
For example, because a commercial property is normally specialised for a certain type of tenancy, it might be difficult to find immediately a tenant that can operate their business in your property.
Residential tenant-Commercial Tenant
- 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.
- The terms of the lease are rarely meddled with by governments and authorities at large.
- Banks tend lend only 50-70% of the purchase price
- The vacancy rate is stretched till you find a new lessee.
- 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.
- Rules and regulations favour the tenant’s rights of occupancy.
- Banks (nowadays) lend up to 80% (used to be 100%) of the purchase price.
- Low vacancy rate.
Conclusion to the question of “Residential tenant-Commercial Tenant”?
Horses for courses!