House for sale residental vs commercial 1
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A basic question on the minds of young and first-time property investors is – should we buy residential or commercial? While both options come with boons and negatives – it’s not always easy to decide which is best for the individual buyer. Perhaps, the sheer amount of information in circulation only serves to confuse the novice buyer further.

To help you get on the right path toward making a sound decision, we’ve simplified the pertinent points and differences between residential and commercial properties:



1. Title Types

The title generally states the purpose of the property as well as the restrictions and responsibilities by which owners and tenants will need to adhere.

Residential: In its most simplified terms – residential properties are for living or staying – you may reside here and use it as a home address. Under this title, you have more freedom to run your air conditioners all day long if you like or have parties. You may not however, (unless with special permissions) run a business from this address.

Commercial: Conversely, commercial properties are to be purposed for conducting business or related activities only. But of course, certain condos come under a commercial land title and some properties that can be lived in have a mixed title, making the distinctions less obvious.

For more on this, do check out our comprehensive piece on Categories of Homes in Malaysia.



2. Utilities, Taxes and Fees

Each property type is charged a different rate for utility services as well as property taxes (quit rent and assessment tax) and various fees.

Residential: Utility rates for one are definitely lower than what’s levied for commercial properties. For example, residential homes enjoy a lower TNB electricity tariff of RM0.218 per kWh whereas commercial properties pay almost double at RM0.435 per kWh for the first 200kWh. Even property taxes are lower and services by Joint Management Bodies (JMBs) and Management Corporations (MCs) are exempt from GST.

Commercial: On average, utility tariffs across the board for commercial properties tend be higher than residential rates and in terms of assessment, costs 2.5 times more. In addition, certain supplies such as service and maintenance charges imposed by JMBs or MCs for commercial properties will be charged GST.



3. Margin of Financing

Buying a property often requires a loan, but the margin of financing for each type of purchase will differ.

Residential: Margins can stretch as far as 95%, where even zero-down, 100% loans are possible through various government schemes. Nonetheless, such properties are meant to be occupied by the owner and not rented.

Commercial: Property loans are generally provided with financing margins of 80% to 85% the purchase price (on average) and at slightly higher interest rates. Still, there isn’t a mandated restriction on the margin as there is with residential loans, where the first two properties may receive 90% of financing – but when buying your third property, the max is 70%. Nevertheless, certain commercial property types could be subject to smaller financing margins depending on the lending bank. 



4. Rental Yields

It’s not easy to say which yields more because potential profits rely on more than just property title distinctions. You would have to first factor in the location, property construct style, amenities, economic conditions and building quality for example.

Residential: While these property types may spell a lower return to comparable commercial properties within the same locale, the costs to owning a residential property are lower. Here the probability of ownership is more attainable, though with lower potential profits.

Commercial: Commercial properties do return a higher yield and typically picks up in market price more quickly than (landed) residential properties do. Still, the capital and overall costs to purchase a highly-sought commercial property are characteristically higher than a residential property.



5. Rental Stability

Residential: Properties are easier to rent out but occupancy periods may be shorter, often lasting one to three years. Still, residential homes are starting to benefit from the possibility of lucrative short-term rentals and vacation stays. However, the property will need to be maintained and furnished thereby incurring some costs in addition to tenants requiring more active management.

Commercial: These properties may have an edge here since business tenants tend to stay longer, possibly from two to ten years, especially if modifications have been made to the property. This would limit the costs to rent (e.g. agent fees, advertising, etc.) however; vacancy periods are longer as well. Thus, buyers will have to cover loan instalments out-of-pocket until a suitable tenant is found. 



6. Tenant Accountability

Residential: It can be tricky (and costly) to legally evict tenants from residential properties. Note that squatting is a serious concern, especially for homes purchased through auctions. Moreover, since the home will be “lived-in”, expect significant wear and tear – usually borne by the owner.

Commercial: Tenants are often businesses and this could be a positive for owners. Why? Because there is better legal recourse for owners in case of rental defaults, etc. In addition, a commercial property is often well-maintained as business tenants typically need to uphold a positive professional image and workplace environment.



7. Insurance

Whether commercial or residential, property purchases are often financed by a bank loan that typically makes insurance a compulsory purchase. A Mortgage Reducing Term Assurance is purchased to cover loans in case of a borrower’s (extends to SME and business financing) inability to make payments due to death or disability. In addition, a fire insurance policy could be insisted on as well to protect the property, so it may remain a viable asset if repossession is necessary.

Residential: There is not a compulsory insurance requirement on landed homes if you buy with cash. If you plan to rent it out however, 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: These properties are required to have fire insurance and sprinkler systems installed to provide cover and protection against potential mishaps. 



Conclusion

The best decision when investing (or buying for personal use) is to go with the property that you can afford. Speculation from developers and real estate professionals on how much you could potentially earn in rental yields or how quickly the property might appreciate will definitely be tempting. But, it’s important to take these figures with a grain of salt.

Commercial properties may on average produce a higher rental yield, but if you can’t afford it, you could start small with an affordable residential property. Here are some of the best cost-efficient homes to consider (as featured on PropSocial) Kajang East in Semenyih; Empire Damansara in Damansara Perdana and; V’Residence in Cyberjaya.



(Written by: Desiree Nair, 12th February 2017)

15219622 10209964317118703 4156465930576326297 n small

Great Article ! It's very useful for first time buyer =)

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yet to buy any commercial property, short of cash on hands.

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@Nic... May i suggest just purchase the commercial property as joint ownership with others... will definitely be cheaper... and maybe can get higher margin of finance too!


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@domng good idea. will sort it out.

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@Nic... if it is between a commercial shop/office and a residential unit in the same neighborhood... both selling with less than 10% difference (unlikely in current market)... which would you buy and why? :^)

Kate chew small

Very useful piece of article! :)

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@domng rental rate and how soon the unit can be rent out should take into consideration, and future appreciation rate.

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@6011_3531_5354 

I personally think the below differences:

Commercial (long term high risk investment, higher initial investment, lower loan margin, higher tax, more expensive utility bill, no renovation required before rent out,)

Residential (short to medium term investment, lower initial investment, higher loan margin, lower tax, cheaper utility bill, renovation required before able to rent out)

James bond craig junio2006 small

Dominic, doesn't seem like there's any benefit buying commercial title then. Haha.

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@james_bob 

Ofcourse there are benefits buying commercial, higher risk comes with higher returns...

Same goes for capital appreciation in the long run.

It is totally a different game than buying a residential property.

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@domng as long as u buy a hot area with good price, manage to rent out then ok

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@6011_3531_5354 

Agree... renting out a commercial property, is different from renting out a residential unit... need patience and maybe a bit of luck!

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@domng lack of capital to invest in commercial property

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@6011_3531_5354 

Suggest you to rope in a few other partners if you really think a particular commercial property is worth investing... opportunities come and go.

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Regretted buying commercial units. I will stick to residential from now on.

L  2c3e50 small

Informative! :)

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@veron  

It would be good advice to others looking to invest in commercial units if you share with us what was the issue you have faced with your commercial property?

Thanks in advance!

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Well, I bought a residential unit (3 bedroom serviced residence) with a commercial title. And it's not under Schedule H. It's been 3 years now and it's not even building up to 2nd floor yet. So, imagine my nightmare!

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@veron 

Oh i see. Initially I thought your commercial unit is a shoplot. Not even build to 2nd floor!  By right the total floors is how high?