3 differences between commercial and residential property investment

Published 18 Oct 2018

If you're considering purchasing property you should be fully informed about the differences between commercial and residential investment and relevant property law. The varying factors include legal considerations, differences in tenancy arrangements and long-term returns on your capital. Here's a guide to three differences between commercial and residential property investment.

1) Legal rulings

Commercial and residential real estate have common legal disputes, including boundary issues. This can occur if part of a building or surrounding grounds protrudes or affects a neighbouring plot of land. However, there are generally a broader range of legal issues to consider when investing in commercial property, such as:

  • Zoning and land use: Most commercial activity in NSW can only occur within commercial/agricultural zones. This can lead to disputes over business taking place in a residential area, or become an issue if property crosses commercial boundaries.
  • Property taxes: These can often be higher than residential taxes, which can lead to disputes over the activity taking place within the building. Taxation rates also differ between different sizes of property and industry sectors.
  • Commercial property insurance: Insurance policy disputes are central to numerous legal cases. Residential property owners have different kinds of insurance claims to consider.

2) Tenancy arrangements

There are numerous differences between the tenancies of a commercial and residential property. Often commercial facilities have longer leases than residential equivalents, which offers greater security for investors. However, this is because commercial properties tend to take longer to find a tenant than residential buildings.

Commercial facilities also tend to have more complicated lease terms. While residential property leases normally see the tenant paying a simple monthly rate for rent, utilities and power, commercial investments can differ greatly on terms.

A gross lease, for example, leaves the landlord responsible for covering utilities, insurance and maintenance costs. On the other end of the scale, net leases require tenants to cover these costs. This can cover the basics all the way up to ongoing property repair costs in case of damage.

The differences in tenancy arrangement are normally determined by both parties. This makes the presence of a residential law solicitor vital to securing favourable terms.

3) Long-term returns

Financing a commercial property is very different from a residential property. While most residential property loans can be taken out with a 20-30 year repayment timeline, commercial property investment often comes up with a 'balloon payment' requirement to cover the remaining cost of the purchase after 5-10 years, regardless of your financial situation at the time.

However, commercial properties often yield higher returns than residential equivalents. This is because these investments require less day-to-day management and recoup higher rents.

To ensure your next property investment best suits and that you have expert guidance in case any legal issues come up, contact Malouf Solicitors today.

Please call us on 02 8833 2000 to speak with a lawyer

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John of Parramatta NSW

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