Property management involves a lot of risk, and at apm our focus is on risk reduction strategies for our owners.  Part of this service includes hosting property investment seminars on topics of interest to our clients including differences between residential and commercial property.

At a recent property investment seminar ‘Understanding Property Investment and Recent Legislation Changes’, James Bangerter, apm Southern Area Commercial Manager outlined the differences between management and ownership of residential and commercial property. Below are 5 differences between residential and commercial property ownership.

Whether you are investing in Residential property (standalone, units, duplexes, townhouses, apartments) or Commercial property (office buildings, retail spaces, warehouses, industrial areas, medical spaces) there are management and ownership differences that need to be considered.

#1 – Financing

• Residential Property – Investors currently need about a 30% deposit/Loan to Value Ratio and residential investment may be easier to finance with more options available such as conventional mortgages or non-bank loans, and interest rates are typically lower. You can learn more about residential investment lending here.
• Commercial Property – Investors currently need about a 65% – 50% Loan to Value Ratio (dependent on the type of commercial property). Financing for commercial property can be more complex and interest rates tend to be higher and there are more stringent qualification criteria. You can learn more about commercial investment lending here.

#2 – Leasing and Lease Terms

An important part of owning a residential or commercial property is having good quality tenants.

• Residential Property – Leasing can be undertaken by a Property Manager and there are fees charged by a Property Manager to a Landlord for the leasing process (viewings, marketing, documentation, checks). The application process is strictly guided by the Residential Tenancies Act (RTA) and is also impacted by the Privacy Act. It’s important to do thorough background checks, reference checks and credit checks on prospective tenants.
  Residential properties typically have shorter lease terms which can be fixed (about one year) or periodic tenancies. Tenants are charged a bond (four week’s rent) plus a week’s rent in advance. Residential property is heavily regulated with legislation around eviction, rent control (rent can be reviewed only once every 12 months as per the RTA) and habitability standards.
• Commercial Property – A commercial property is leased to tenants by a Commercial Leasing Agent and a leasing fee is charged (typically two months’ rent +GST). Due diligence needs to be performed on both the individuals on the lease, as well as the business.
  Commercial properties typically have longer lease terms ranging from one year to 10+. It’s not uncommon to have 15-30 year leases. A bond of any amount can also be charged to a tenant and should be held by a solicitor or property management trust account. Rent reviews are set out by the lease as commercial lease agreements have more flexibility.

 #3 – Documentation

• Residential Property – Rental properties need Application Forms (compliant with regulations for the Privacy Act), and Tenancy Agreements/Renewals (compliant with regulations). Tenancy Agreements must include information about Healthy Homes, Insulation and Insurance. Rental documentation around tenancies can be drafted by the Landlord (by using Tenancy Services templates), or by a Property Manager who uses legally complaint templates via specialised property management software.
• Commercial Property – Commercial properties have a variety of documents such as an Agreement to Lease (usually drafted by a Leasing Agent), a Deed of Lease (drafted by a Solicitor), and Deeds of Renewal, Variation, Assignment, Rent Review and Surrender (also drafted by a Solicitor).

#4 – Management and Maintenance

• Residential Property – Most maintenance issues are a landlord responsibility so residential property can be more hands-on by managing individual tenant issues. At apm, we use a specialised maintenance software so tenants can report maintenance and Property Managers can easily liaise with compliant tradespeople. Landlords are responsible for paying fixed water charges (not usage) and rates. Inspections are regular with usually an Ingoing inspection, Routine inspections (three-four monthly), and Outgoing inspection. Arrears collection (such as water or rent) needs to follow a process dictated by the RTA, but resolutions can be made with the tenant, or via the Tenancy Tribunal. Residential properties need to have an Asbestos Plan and Report, and adhere to Healthy Homes regulations.
• Commercial Property – May require less day-to-day management as most maintenance issues are a tenant responsibility. A budget is generally required and outgoings that tenant’s pay include land rates, insurance, BC levies, property management fees, BWOF costs, and service fees. Inspections are similar to residential with an ingoing and outgoing (make good) are standard process however routine inspections are of a varying frequency during a tenancy. Arrears for rent or outgoings have a larger impact and the process is dictated by the Property Law Act, the Disputes Tribunal or High Court. Commercial properties also need to have a Health and Safety Plan and an Asbestos Survey and Plan.

#5 – Return on Investment (ROI)

• Residential Property – Typically has lower risk but there is lower returns as the housing market is generally more stable and less affected by economic downturns. Housing is always in demand.
• Commercial Property – Potentially has higher returns but the risk is higher. Income is often tied to the success of a tenant’s business and can fluctuate with economic conditions/downturns.

At apm our Property Managers aim to build long-term relationships with our property owners to help with their property journey. We have a great team who have years of experience managing both residential and commercial investment properties. If you wish to discuss the management of commercial or residential property then get in touch with our team today!