Northbridge / Castlecrag

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Should you invest in commercial or residential property? As with so many things in life, there is not a simple one-word answer to this question but by outlining a few of the pros and cons, we hope to make the decision a little easier for you.

Commercial Property Investment

The first thing that you need to be aware of when contemplating investing in a commercial property is that, generally speaking, it can be more difficult to obtain finance for such investments and even if you do obtain the finance you need, your lender will almost certainly require a bigger deposit than for a residential property loan of a similar amount. This will obviously only be a concern if you need to borrow the money that you wish to invest.

There are a couple of advantages to investing in commercial property that immediately spring to mind:

• Lower Running Costs – When renting out your properties, you can reasonably expect your tenants to foot the bill for rates and building insurance, which is often not the case with residential properties.

• Property Renovations – If you rent out a residential property, the chances of your tenants paying for any home improvements are almost nil. However, many commercial property tenants will invest a considerable amount in property renovations if they feel that it will help their business. These renovations could add thousands to the value of the properties in question.

The two main disadvantages that come to mind when discussing commercial property investment are:

• Uncertain Income – Commercial properties can be much harder to rent out than residential ones and should the economy take a turn for the worse, could be standing vacant for months or even years.

• Depreciation – Even though the land on which they are standing may increase in value, all buildings depreciate over time and commercial ones generally take up more of the land on which they stand: something you definitely need to bear in mind when making a substantial investment

Residential Property Investment

One of the biggest attractions of investing in residential property is the fact that most people already know far more about it.

Other advantages associated with residential property include:

• Potential for High Capital Gains – Although there are never any guarantees, the situation regarding residential properties is a mirror of that for commercial ones. Because a house usually has more empty land surrounding it than a commercial property, it offers greater potential for capital gains.

• Easy to Rent Out – In most parts of the country, a house or apartment is considerably easier to rent out than a commercial building and will therefore be standing empty for less time.

The disadvantages you may encounter include:

• Lower Income – Potential rental income as a percentage of investment costs is lower for residential properties.

• Higher Running Costs – You will be responsible for the maintenance associated with a residential property, and for some other running costs.

To summarise, it is probably fair to say that commercial property investment is a riskier proposition that can offer bigger rewards, whilst residential property is a safer, slightly less rewarding alternative.

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