The questions that come in mind by the beginner and young investors is – should we buy residential or commercial properties? It’s not always easy to determine which is best for you, as both options come with pros and cons.
To help you get on the right path toward making the best decision, we’ve simplified some essential points and differences between commercial and residential properties that you must know:
1. Title Types
The title is the purpose of the property, your home address.
Residential Properties are for living or staying.
Commercial Properties are for conducting business or related activities only. But, some condos may come under a commercial land title (e.g. SoHos, SoVos, SoFos) and some properties that can be lived in have a mixed title, making the distinctions less obvious.
2. Utilities, Taxes and Fees
Commercial properties and residential properties are charged at a different rate for utility services as well as property taxes (quit rent and assessment tax) and various fees.
Residential Properties: Basically, utility rates for residential are lower than commercial properties, costs 2.5 times lower. Even property taxes are lower and services by Joint Management Bodies (JMBs) and Management Corporations (MCs) are exempt from GST.
Commercial Properties: Utility rates for commercial are higher than residential properties. For instance, commercial properties pay almost double at RM0.435 per kWh for the first 200kWh and residential properties enjoy a lower TNB electricity tariff of RM0.218 per kWh. GST will be charged when service and maintenance charges are imposed by JMBs or MCs for commercial properties.
3. Margin of Financing
The margin of financing for commercial and residential properties are differ.
Residential Properties: Margins can stretch as far as 90%, where even zero-down, 100% loans are possible through various government schemes.
Commercial Properties: Normally financing margins of 80% to 85% of property loans and at slightly higher interest rates will be offered to commercial properties buyers.
4. Rental Yields
It’s hard to say exactly which yields more because potential profits rely on more than just property title distinctions. Factors such as location, property construct style, amenities, safety, facilities, economic conditions and building quality need to be considered as well.
Residential Properties: It may have a lower return when compared to commercial properties within the same location, the costs to owning a residential property are lower.
Commercial Properties: Commercial properties do have a higher yield. But, the capital needed and the overall costs to purchase a commercial property are more higher than a residential property.
5. Rental Stability
Residential Properties: Occupancy periods of residential properties may be shorter, often lasting 6 months to 1 year, and more easier to rent out. Also, residential homes are starting to benefit from short-term rentals.
Commercial Properties: Occupancy periods of commercial properties may be longer, often lasting 2 months to 10 years, and vacancy periods are longer as well. Thus, buyers will have to cover loan installments out-of-pocket until a suitable tenant is found.
6. Insurance
Whether commercial or residential, property purchases are often financed by a bank loan that typically makes insurance a compulsory purchase.
Residential Properties: If you plan to rent out your homes, you’ll notice that most tenancy agreements come with a fire insurance clause that often extends to cover other acts of nature such as floods and lightning damage. Owners of residential properties with strata titles do pay for their portion of fire insurance policies since it is a compulsory purchase by the MC.
Commercial Properties: These properties are required to have fire insurance and sprinkler systems installed to provide cover and protection against potential mishaps.
The best decision when investing is to go with the property that you can afford. Commercial properties may on average produce a higher rental yield, but if you have a limited budget, you could start small with an affordable residential property. Then, only go for commercial properties.
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