Residential vs. Commercial Real Estate
Investment Comparison
I actually live and work in the Toronto area, in Ontario,Canada, and There are
different kinds of properties you can invest in and the benefits and pitfalls
of developing a portfolio of properties that is not only residential or commercial.
I can
help you invest in Real Estate By means of Acquisition, Disposition, Renting,
Leasing, and related Mortgage Financing.
Law
Residential Property
The law in Ontario for
residential property is not kind to investors. Landlords are not protected and
a lot of waiting is required before being able to get non-paying tenants out.
Also I have seen cases of non-payment that took over 10- 12 months to resolve,
Especially Basement & Apartments. Even if you are proactive, you are
looking at 3 or 4 months before the process is complete.
Commercial Property
Commercial property law can be very complex and the leases can be
intimidating. The good news is that unlike residential leases, these leases are
subject to contract law. This means that the lease is whatever you and the
tenant agree to and it is enforceable. Absolutely everything can be stipulated
in the lease and is binding on both parties. I suggest a lawyer help you with
this at first until you get the hang of it.
Commercial leases can also be simple. One thing all commercial leases have
in common is that they really protect the landlord. Leases are renegotiated,
not automatically renewed and there is no limit to the rent increases except
what you contracted to and what the tenant can pay or the market will bear.
Dealing with non-payment of rent is easy. Here I am quoting from the
Commercial Tenancies Act (link).
As stated.
Rights of re-entry
Re-entry on non-payment of rent
18. (1) Every demise, whether by parol or in writing and whenever made,
unless it is otherwise agreed, shall be deemed to include an agreement that if
the rent reserved, or any part thereof, remains unpaid for fifteen days after
any of the days on which it ought to have been paid, although no formal demand
thereof has been made, it is lawful for the landlord at any time thereafter to
re-enter into and upon the demised premises or any part thereof in the name of
the whole and to have again, repossess and enjoy the same as of the landlord’s
former estate. R.S.O. 1990, c. L.7, s. 18 (1).
Commercial leases are beautiful for the landlords they protect. You can’t
really appreciate this until you have had a residential tenant delay an eviction forever
while you pay the mortgage and all the expenses while they live a free life.
And possibly wreck your property. Ouch!
Ease of Entry & Financing
Residential Property
Currently 20% down is required for a down payment. In the past financing has
been relatively easy but with the new CMHC rules it is becoming more
difficult. CMHC is requiring that only 50% of the rental income of your
properties be considered when calculating your income. This becomes problematic
when you have multiple properties.
Commercial Property
Before the new CMHC rules came into play, this was
really the biggest factor. Commercial properties generally have higher entry
requirements. Down payments are 30 to 35%. Financing is never CMHC
approved so you need good credit and be willing to put personal guarantees on
the building. Mortgage rates are higher. For the beginner there are tons of
little industrial or office or retail condominiums available. You can also buy
a mixed-use building that has a few apartments on the second floor and retail
or restaurant below.
Familiarity
Residential Property
A second benefit of residential rentals is people’s familiarity with that
kind of real estate. Rare is the person who has never rented or lived in a
house. People are well acquainted with the processes involved in this business.
They are also somewhat knowledgeable about the usual building systems of a
house. Plumbing, electrical, furnaces and air conditioners are all somewhat
understood by most people.
Commercial Property
Depending on what you buy there may be lots of building elements that you
are not familiar with. The other day I was checking out an industrial building
full of commercial laundry equipment. One machine was the size of two pick up
trucks side by side. I had never seen anything like it. Basically units you buy
can be outfitted for anything from a restaurant, an office or any other type of
business. There is usually no presentation involved so you have to look past
the dust and debris.
Vacancy Risk
Residential Property
A third benefit of residential is the considerable number of potential
applicants. Vacancy is currently low and a property with a decent price in
decent condition is not likely to stay empty for long.
Commercial Property
This is the tricky part. These properties can be more difficult to rent. You
must also evaluate the feasibility of that business at that location. I once
rented a space that had been vacant for five years. The location was a pizza
store but it was the stupidest location ever for pizza. Have you ever seen a
pizza store on a quiet one-way street? It was also extremely disgusting with
years of cooking grease on the walls. Presentation counts!!! I sold all the
pizza equipment for a song, we power washed, painted and it rented in a month.
Generally these spaces stay empty longer and are more difficult to rent. Be
proactive and spend some money on advertising. Consider changing the use. Clean
up and present the space in good condition.
Once the space is rented though tenants will stay for a long time. It’s not
like packing up a cube van for a residential tenant. Commercial tenants have
clients, business cards, ads in the Yellow pages and all kinds of expensive
commercial equipment. Moving is very expensive for them so you can usually look
forward to long leases. Five or ten year leases with options to renew are
normal. Certain businesses are more prone to failure than others so choose
accordingly.
Purchasing
Residential Property
The biggest problem with new investors is that in a tight market like Toronto
is that they are very vulnerable. There’s a ton of people who just don’t care
about you who are willing to separate you from your dough. I would say that
about 90% of the offerings in the Toronto
market would not qualify for my definition of investment.
AN INVESTMENT PROPERTY MUST PAY
YOU TO OWN IT.
This is not a pretty house you own and rent out in hopes of the land
appreciating. That is speculation and I can assure you that one day, property
value will go down. If you buy for cash flow with the proper safety margins in
place, it really doesn’t matter because every month that building is being paid
off and, it’s paying you to own it. That is investment.
Because there is so much crap on the residential market waiting for a
sucker, the smaller entry-level properties that are decent with potential go
very quickly and there’s a lot of competition.
Commercial Property
Not sexy comes to mind when talking about commercial property. I can assure
you there’s a lot less competition for these properties. These properties are
sold in a much different way. You get things like income statements and expense
reports. In short it’s about the money. I find the “appeal to emotion” sales
strategy irritating as hell when I’m looking at income property. I’m never
going to live there so show me the numbers and stop wasting my time. You’ll
find a lot more people who know how to do this around commercial property
purchases.
Passing on costs
Residential Property
Another risk involved in smaller residential property is the difficulty of
passing on costs. Rent increases are limited by legislation. Consider that
Hydro costs alone will increase a full 25% this year. You can see how this can
quickly become a problem. If your investment property is a condo you may well
get very significant increases in maintenance fees. It’s easy to see how the
small landlord can quickly end up subsidizing his tenants housing by several
hundreds of dollars every single month. OUCH!!!
Commercial Property
Most leases for commercial properties are Net Net Net (Triple Net). This
means that the tenant is responsible for Taxes, Maintenance and Insurance for
the property. Utilities are paid by the tenant; you never know what the space
will be used for. Some businesses use lots of hydro, gas or water. In some
shopping centers the landlord even gets a percentage of gross sales for the
business.
You can be fully insulated against increases in your costs.
So investors I challenge you to stretch a little and really consider
commercial type properties. When you’re in business there are always
risks but in my opinion the legal risks of being a residential landlord are
considerable compared to commercial property. The ease of entry and familiarity
of residential investments is a not sufficient reason to invest in that market.
For the new investor you can buy mixed-use properties and get the best of both
worlds and diversification to boot. Remember; fall in love with the numbers not
the properties.
Both investments are good weather it is Residential or Commercial, Only thing is require is the assessment of the risk and plan before you take risk of investment for success. Call us/ Email /contact us We can help you find out the best results for you.
Vijay specializes in Residential-Commercial Real estate. He also works
with investors to find good investments in Toronto
and surrounding areas. His passion is bringing multi res properties back from
the brink and maximizing profitability.
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