Commercial vs Residential Property Investment

Commercial and residential property look similar on the surface but are very different investments. If you are new to the asset class, start with what commercial property is; if you are moving from buy-to-let, these are the differences that matter.

Leases

Residential lets are short, and the landlord carries most repairing and safety duties. Commercial leases are longer, often on full repairing and insuring terms, so the tenant maintains and insures the building. Business tenants may also have security of tenure under the 1954 Act.

Tax

• Interest: the residential Section 24 restriction does not apply to commercial, so loan interest is fully deductible. See corporation tax on commercial property.
• Stamp duty: the non-residential rates are lower and have no surcharge. See commercial SDLT.
• VAT: commercial property can be caught by VAT and the option to tax, which does not arise for residential lets.

Running costs

On commercial property the tenant usually pays business rates and, in a multi-let, a service charge. The landlord's exposure is often lower during a letting, but voids and empty rates hit harder.

Risk and reward

Commercial can offer higher yields and longer income, but tenant covenant strength, sector trends and longer voids matter more. It suits investors who want income and are comfortable with the different risk profile.

Does Section 24 apply to commercial property?

No. The Section 24 interest restriction hit residential landlords only; commercial landlords can deduct loan interest in full.

Who pays business rates on a commercial let?

Usually the tenant, unlike council tax on a residential let where the tenant also pays but the framework differs. The landlord picks up rates on a void.