Residential versus Commercial Properties: The Positives

Why commercial properties can be better investments than residential properties

Your ultimate goal in property investments is to eventually move away from the residential to the lucrative commercial property market once your budget exceeds a certain amount.

At the lowest entry level of RM500,000, what will be affordable are strata offices of around 1,000 sq ft. Closer to RM1 million, your options expand and you would be able to go for shop houses, shop offices and strata retail lots. Unfortunately they would be located further away in the sub-urban areas. The higher your budget, the more choices you would have in terms of better commercial properties and locations. For a decent purchase in a good location, your budget should be at least RM1.5 million.

In this article, we shall examine the positive aspects of residential versus commercial properties. They are:

It is a norm for commercial property deposits to be minimum three months for the rental portion and another one month for utilities in view of higher usage. Depending on the tenant business type, the latter deposits may even be higher. For example, food outlets consume a lot of electricity and water. Hence the utility deposits will usually be higher up to the equivalent of three months usage.

On the other hand, deposits for residential properties are usually two months for the rental portion and another half month for the utilities portion.

These higher deposits come in handy in lowering your overall cash outlay.

In places where there is a strong demand for commercial properties and limited supply, there is a tendency for rentals to shoot up sharply in a few years. Hence most landlords would prefer to have shorter lease agreements of two years.

However for other commercial properties like offices or industrial properties such as factories or warehouses, it is common for the lease to be minimum three years either with a pre-agreed increase in rental or it will be renewed at the prevailing market rate at the time of renewal. In the event the existing tenant is not agreeable to continue, it is common for them to give at least three months advance notice to the landlords so that they have sufficient time to look for a replacement. 

  
Longer lease length will mean:

Except for landed houses, it is rare for rental of residential properties to be revised upwards upon renewal. On some occasions it may even have to be revised downwards in view to the ever increasing supply of condominiums in some locations. Assuming the rentals remain the same, you actually lose out in the long term due to inflation.

For example, I purchased an apartment in Brickfields in 1994. The rental at that time was RM1,600 per month. Today, 15 years later in 2009, the rental is only RM1,500. Even though the quantum is more or less the same, the value of receiving RM1,600 in 1994 and RM1,500 every month in 2009 is vastly different. The only good thing is that the price of this property has increased from RM160,000 to RM250,000. Hence if you are depending on the rental income as a sort of ‘retirement pension’, you will not be hedged against inflation over the long term.

For commercial properties, it is common for rentals to go up by at least five to 10 percent per annum. For strata retail shop-lots, there is usually a sharp spike upwards in the rentals as the shopping center becomes more popular. For example, during the last few years, the rental rates for prime shop-lots in Sungai Wang and Berjaya Times Square have increased by more than 50 percent due to more locals and tourists visiting Malaysia!

I know the owner of the money changer business on the ground floor of Berjaya Times Square. In the last five years, his rentals have doubled from RM20,000 to RM40,000 per month! By the way, his shop size is only around 220 sq ft. When I asked him whether it was worth continuing at this high rental rate, he lamented that he had no choice. If he were to vacate, eighteen of his competitors were already in the queue to take over his spot. If he were to give up that spot, it would be lost forever. Hence he had no choice but to work harder and find a way to make the business work.

Appreciation of residential properties depends mainly on demand and supply factors. Over time as prices of newer properties go up due to higher land and construction costs, the prices of older properties will move up in tandem. Historically, the appreciation is usually around five to 10 percent per annum. For example, I had purchased a double storey link house in Bangsar Baru in 1996 for RM530,000. Today in 2009, the house is valued around RM1 million. The doubling of house prices over 13 years while good, it is not exactly great.

For commercial properties, the rentals have a direct impact on the property value. Taking the example of the money changer earlier, as his rental doubled in five years, so did the value of that shop-lot. If you are investing for appreciation, I would recommend going for prime commercial properties instead of landed high end residential properties due to the faster appreciation.

For residential properties, you will need to spend a bit of money to make the property ‘livable’ for your tenant either in terms of renovations and/or furnishings. On the other hand, commercial properties are usually rented out bare. The tenant will have to spend a lot of money to do up the property to their liking and make it look attractive for potential walk-in customers and/or have a conducive environment for their staff to work productively. 

In the event of problems, it is usually more challenging to manage residential tenants. They tend to be more demanding even though the rentals they pay are much smaller by comparison. In some cases, they may even disappear with many months of unpaid rentals as well as utility bills.

For commercial properties, the tenants usually would not want their landlords to disrupt their business or harass their staff. Hence they are more likely to follow the terms of the tenancy agreement.

If you have any comments on this article or questions, please email to me at achievers88@yahoo.com. I would highly recommend that you sign up at our moderated getrichbook egroups at:
 
http://finance.groups.yahoo.com/group/getrichbook/

Article Contributed by:

Milan Doshi
Financial Trainer and Best Selling Author of
“How You Can Become a Multi-Millionaire Real Estate Investor!”
For more information, visit www.milandoshi.com

Copyright by Milan Doshi