RESIDENTIAL VS COMMERCIAL

Residential Vs Commercial

One of the most common questions for young and first-time property investors is whether to invest in residential or commercial property. Both options have their pros and cons, making it challenging to determine which is the right choice for each individual buyer. The abundance of information can often overwhelm novice investors.

To help guide you in making an informed decision, we’ve simplified the key differences and considerations between residential and commercial properties.

1. Title Types

A property title outlines the designated use of the property and details any restrictions or obligations that owners and tenants must follow. This includes zoning regulations, permissible activities on the property, and maintenance responsibilities. The title serves as a legal document that ensures the property is used according to the intended purpose and helps prevent any violations or misuse, protecting both the owner and surrounding community. Understanding these terms is crucial for buyers and tenants to avoid future complications or legal issues.

Residential	Commercial
Residential properties, in the simplest terms, are intended for living or staying and can be used as your home address. This type of property offers greater flexibility for personal use, such as running air conditioners throughout the day or hosting social gatherings. However, running a business from a residential property is typically restricted unless special permissions are obtained.	Commercial properties, on the other hand, are designated for business activities and related purposes. However, some condominiums fall under a commercial land title, and certain properties with a mixed title can be both lived in and used for business. This can blur the lines between residential and commercial uses, making the distinctions less clear in some cases.

2.Utilities, Taxes and Fees

Each type of property is subject to different rates for utilities, property taxes (such as quit rent and assessment tax), and various fees. These charges vary based on whether the property is classified as residential or commercial, leading to distinct cost structures for each type.

Residential	Commercial
Residential properties benefit from lower utility rates compared to commercial properties. For example, TNB electricity tariffs for residential homes are RM0.218 per kWh, while commercial properties are charged nearly double at RM0.435 per kWh for the first 200kWh. Additionally, residential property taxes are generally lower, and services provided by Joint Management Bodies (JMBs) and Management Corporations (MCs) are exempt from GST, further reducing costs for homeowners.	On average, utility tariffs for commercial properties are significantly higher than residential rates, with assessment costs being 2.5 times more expensive. Additionally, service and maintenance charges imposed by Joint Management Bodies (JMBs) or Management Corporations (MCs) on commercial properties are subject to GST, further increasing the cost of ownership and operation for businesses.

3. Margin of Financing

When purchasing a property, most buyers rely on a loan to finance the acquisition. However, the margin of financing, or the percentage of the property’s value that the bank is willing to lend, varies depending on the type of property. Residential properties often enjoy higher margins of financing, sometimes up to 90%, making it easier for buyers to secure funding with a smaller down payment. In contrast, commercial properties typically come with lower financing margins, usually around 70% to 80%, meaning buyers must provide a larger upfront payment. Lenders assess the risks differently for each type of property, which directly impacts the financing terms available to buyers. Understanding these differences is crucial for planning your budget and managing the costs associated with your property investment.

Residential	Commercial
Financing margins for residential properties can reach up to 95%, with some government schemes offering 100% loans, allowing for zero down payment. However, these loans are typically reserved for owner-occupied properties, meaning the buyer must live in the property and not rent it out. Such high-margin financing options are designed to help first-time buyers or those purchasing a home for personal use, making it easier for them to enter the property market with minimal upfront costs.	Commercial property loans typically offer financing margins of 80% to 85% of the purchase price, often with slightly higher interest rates compared to residential loans. Unlike residential financing, where the first two properties can receive up to 90% financing and subsequent properties are capped at 70%, there are no strict regulations governing the margin for commercial properties. However, certain types of commercial properties may still receive smaller financing margins depending on the lender’s risk assessment. This flexibility allows banks to tailor commercial loans to the specific property and buyer profile.

4. Rental Yields

Determining which type of property yields higher returns isn’t straightforward, as potential profits depend on various factors beyond just the property title. While residential and commercial properties each offer different advantages, the true profitability of an investment hinges on key elements such as location, property design and construction, available amenities, and the overall economic climate. For instance, a well-located residential property with desirable features in a growing area may outperform a commercial property in a less favorable location. Similarly, the quality of the building, infrastructure, and nearby services can significantly impact rental demand and resale value. Therefore, investors must carefully consider these factors when evaluating potential returns, rather than relying solely on the type of property.

Residential	Commercial
Although residential properties may offer lower returns compared to commercial properties in the same area, the cost of owning a residential property is generally lower. This makes homeownership more accessible, even if the potential for profit is smaller. Residential investments typically involve lower upfront costs and maintenance expenses, making them more attainable for a broader range of buyers, though the trade-off may be reduced profit margins compared to commercial investments.	Commercial properties tend to offer higher yields and appreciate in market value more quickly than landed residential properties. However, the initial capital and overall costs to acquire a desirable commercial property are typically much higher than those for residential properties. This includes larger down payments, higher financing rates, and increased maintenance or operational expenses, making commercial investments more costly upfront, despite their potential for greater returns.

5. Rental Stability

Rental stability refers to the consistency of rental income over time, meaning rental prices remain steady without major fluctuations. It ensures reliable income for property owners, influenced by factors like location, tenant demand, and market conditions.

Residential	Commercial
While residential properties are generally easier to rent out, their occupancy periods tend to be shorter, typically lasting one to three years. However, there's a growing opportunity for homeowners to benefit from lucrative short-term rentals and vacation stays. This approach can generate higher income, but it requires the property to be well-maintained and furnished, leading to additional costs. Furthermore, managing short-term rentals often demands more active involvement from owners to ensure a positive guest experience.	Commercial properties often have an advantage in tenant retention, as business tenants typically lease for longer durations, ranging from two to ten years, particularly if modifications have been made to the space. This extended occupancy can reduce costs associated with renting, such as agent fees and advertising expenses. However, it’s important to note that vacancy periods for commercial properties can also be longer. Consequently, buyers may need to cover loan installments out-of-pocket until a suitable tenant is secured.

6. Tenant Accountability

Tenant accountability refers to tenants’ responsibility to follow the terms of their lease agreement, which includes paying rent on time, maintaining the property, and adhering to any rules set by the landlord. Key aspects include timely rent payments, property upkeep, compliance with lease terms, and open communication with the landlord. When tenants are accountable, it fosters a positive rental experience and helps landlords manage their properties more effectively.

Residential	Commercial
Legally evicting tenants from residential properties can be challenging and costly. Squatting is a particular concern, especially for homes acquired through auctions. Additionally, because these properties will be occupied, owners should anticipate significant wear and tear, which they will typically be responsible for managing and repairing.	Tenants in commercial properties are often businesses, which can be advantageous for owners. This is because owners have stronger legal recourse in cases of rental defaults and other issues. Moreover, business tenants generally maintain the property well, as they need to uphold a positive professional image and provide a conducive workplace environment. This can lead to less wear and tear, ultimately benefiting property owners in the long run.

7. Insurance

Regardless of whether the property is commercial or residential, most purchases are financed through bank loans, which often require insurance as a mandatory condition. One common type is Mortgage Reducing Term Assurance, designed to cover loan payments in the event of the borrower’s death or disability, extending to SME and business financing as well. Additionally, lenders may require a fire insurance policy to protect the property, ensuring it remains a viable asset in the event of repossession. This combination of insurances helps safeguard both the borrower and the lender’s interests.

Residential	Commercial
When purchasing landed homes with cash, there is no mandatory insurance requirement. However, if you plan to rent out the property, most tenancy agreements will include a fire insurance clause that often covers additional risks like floods and lightning damage. For residential properties with strata titles, owners are required to contribute to fire insurance policies, as this coverage is typically mandated by the Management Corporation (MC). This ensures that all units are protected against potential hazards, providing peace of mind for both owners and tenants.	Commercial properties are generally mandated to have fire insurance and sprinkler systems installed to ensure adequate protection against potential hazards. Fire insurance safeguards the property against damages caused by fire, helping owners recover financially in the event of a loss. Meanwhile, sprinkler systems play a crucial role in fire prevention and control, minimizing damage and enhancing safety for occupants. These safety measures not only protect the physical asset but also contribute to compliance with local regulations and standards, reducing liability risks for owners. By investing in these protections, property owners demonstrate a commitment to the safety of their tenants and the longevity of their investment.

Summary

The most prudent decision when investing in property—whether for personal use or as an investment—is to choose a property that fits your budget. While developers and real estate professionals may entice you with projections of potential rental yields and rapid appreciation, it’s essential to approach these figures with caution. Although commercial properties often offer higher average rental yields, they may not be financially feasible for everyone. Starting with an affordable residential property can be a smart way to enter the market without overextending yourself.

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