Residential property vs commercial property

What’s the difference between residential property and commercial property? Seeff offers insight and guidance for property investors.

Are you eager to explore the residential and commercial property markets for an investment?

While COVID-19 has been cruel to the economy, the South Africa property market is growing once again, and Seeff has witnessed first-hand the booming demand for residential property.

Now could be your time.

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Read on for Seeff’s analysis of residential property vs commercial property and what factors investors should consider before making a decision. 

What Is Commercial Property

The purpose of a commercial building is to generate profit. Examples of commercial property are retail stores, malls, office blocks, and warehouses. 

Seeff’s Commercial Property Services:

• Commercial buildings for sale. From small to spacious office blocks, from factories to charming retail stores, there’s a variety to choose from when you decide to purchase a property. 

However, it’s worth consulting a property investment expert for guidance. They’ll understand the market; and explain everything from interest rates to evaluating the property itself, so you receive the best value. 

• Commercial spaces to let. Letting commercial space has its pros and cons (Seeff will unpack these further on). Don’t assume that letting a commercial building will be more manageable than letting a residential home. Once again, consult a real estate agent for advice.  

What Is Residential Property

The purpose of residential property is to accommodate people. Interestingly, a property must be less than four units to be classified as residential. A “mixed-use building” is a property that’s used for residential and commercial purposes.

Using Residential Property For Commercial Purposes

• Check your zoning regulations:
  If you want to start a business and employ staff from your home or residential area (especially if this will involve construction), you need to file a request to get the property and land rezoned. 

Zoning laws cover what you can and cannot do in a particular area. To protect yourself from liability, you need to ensure you aren’t infringing on any laws.  

• Consider the tax increase:
  As a business - especially a business that’s using more utilities (water, electricity…) and experiencing a higher volume of human activity than a residential home -  your property tax will increase. 
  
  If you’re renting the property and want to convert to commercial, first consult the lease agreement. 
  Among other things, a lease agreement will stipulate payment terms, any restrictions regarding pets or additional tenants, and the purpose of the property as used by the tenant. This matters when you want to change the purpose of the property.

The consequences of breaking a rental agreement could include financial penalties and even a lawsuit.

The Difference Between Residential Property and Commercial Property Investment

Each property type has its pros and cons, but Seeff unpacks three differences between residential and commercial below: 

1. Lease agreements:

These are usually shorter with residential tenants, but residential tenants are also easier to come by than commercial tenants because of the consistent demand for houses. 

So even if tenants vacate, it’s unlikely you’ll have to wait a long time to get in new ones. Whereas for commercial property, it’s harder to find new tenants, and the building could be empty and not bring in cash for long periods of time.

2. Additional costs: 

Commercial buildings incur higher tax and maintenance costs. It’s easy to see why: the premises are generally more extensive, with more physical areas to upkeep. 

On the other hand, a residential property might suffer more wear and tear from everyday use - while a commercial building is likely only used during business hours. Ultimately, you need to decide if the money you’re putting into the property outweighs the money you’re earning out of it.

3. Cost of entry:

This initial cost is more manageable and affordable on residential property. But again, consider the future: while you might pay more upfront to purchase a commercial building, you’ll earn more from your tenants than you would in a residential home. Is it worth it? Do cost forecasting to help you make a decision.

Make A Smart Property Investment With Seeff

When it comes to residential vs commercial property and real estate investing, there’s no easy answer. You have to weigh up the advantages and disadvantages of your situation, so it’s essential to consult a property professional.