Differences Between a Residential and Commercial Property
Investing in real estate can reap many rewards, depending on what type of real estate you invest in. There are several key differences between residential and commercial real estate properties in terms of the laws that govern them and how they are run. Keep reading to learn a few key differences between the two. If you’re interested in breaking into the commercial real estate market, trust ReDev Properties to be your go to commercial property advisors in Ontario.
Key Differences Between Residential and Commercial Real Estate
The laws concerning residential property in Ontario is not geared toward protecting investors. As well, landlords are not protected, and there is a lot paperwork and waiting in order to evict troublesome tenants.
On the flip side, commercial property law can be far more complex and leases are subject to contract law. This means that the lease is whatever you and the tenant agree to, and it is enforced by the law. All the terms are stated in the lease and is binding to all parties.
Commercial leases can be simple; the one thing all that commercial leases have in common is that they are made to protect the landlord and investors. Leases are not automatically renewed but renegotiated, and there is no limit to the rent increases.
Ease of Entry & Financing
The required down payment for residential properties is currently at 20% down. Before new CMHC (Canada Mortgage and Housing corporation) rules came into effect, past financing was fairly easy, but has become more difficult. CMHC is now requiring that only 50% of the rental income of your properties can be considered when you calculate your income. If you have one residential property this is not much of an issue, but when you have multiple properties it can become problematic.
Commercial properties typically have higher entry requirements. The down payments are between 30% to 35%, and the financing isn’t CMHC approved so good credit is a must. Mortgage rates also tend to be higher for commercial properties.
One huge benefit right now for residential property, especially in the Toronto area, is the number of potential applicants. Vacancy rate are very low and a property in the GTA is not likely to stay empty for long.
Depending on the location, commercial properties can be a bit more difficult to rent. You also need to consider the feasibility of that business at that location. These spaces may be more difficult to rent out, and as a result stay empty longer.
Passing on costs
Smaller residential properties are more difficult to pass on costs. Rent increases are limited by legislation and the cost of hydro will increase 25% this year. If the property is a condo you, maintenance fees are another expense that can easily increase.
Most leases for commercial properties are net, so tenants are responsible for maintenance, insurance, utilities, and taxes for the property. This is because some businesses use a lot more hydro, gas or water than others.