COMMERCIAL OR RESIDENTIAL PROPERTY INVESTMENT?

Assalamualaikum and hye readers.

Are you planning to buy a commercial property in Malaysia but cannot decide if commercial property is a good investment plan? Real estate agents often get asked whether a commercial or a residential property is a good investment plan. A commercial property typically refers to retail buildings, office buildings, warehouses, industrial buildings, apartment buildings and mixed building where it can be a mixture of retail, office or apartment. Make sure you engage with a real estate agent that is certified with the Board of Valuers, Appraisers, Estate Agents and Property Managers (BOVAEA). This guide will list down the differences between commercial property and residential property and also the advantages and disadvantages of investing in a commercial property in Malaysia.

1.       1-    Risk and return

For residential property, there is a demand and supply whereas for commercial property, it is much more risky in Malaysia as compared to residential property due to the economy. With bad economy it brings lesser and lower purchasing power. This will then lead to a lower demand for retail shops.

2.      2-   Lesser stress for tenant management

It is common to have tenants that are from large companies or corporations whereas the tenants for residential properties are typically individuals. With such big companies or large corporations, you can worry less on late rental payment as they are more reliable and tend to avoid the breaching of tenancy agreement.

Tenants for residential properties will normally request or prefer a fully furnished unit whereas tenants for commercial properties prefer an unfurnished unit because they tend to refurbish and decorate the unit accordingly. This will then save the owner a lot of furnishing and renovation costs.

In addition, commercial tenancy will have a longer lease between 2 years and 10 years, whereas residential tenancy will turn over every 6 months to 12 months maximum, which is considered short as compared to a commercial tenancy. This is due to business commitment that the tenants have committed to as they spent a huge sum in renovating the shops for business purposes, hence, a longer lease.

Moreover, let us say your commercial units are located in a prime area, there will automatically be tenants lining up and wanting your commercial units. The current tenants will most likely to renew their tenancy as well. That being said, you will be able to skip the hassle of looking for new tenants all over again.

3.      3-   Profitable market

The best reason to invest in commercial property over residential property is the higher income potential. Commercial property generally has higher rental rates and higher property value as compared to residential property. The appreciation of property value for commercial property is generally much faster and higher as compared to residential property. Furthermore, commercial units will have higher rental rates as compared to residential units, especially in prime area. Commercial property will normally have an annual return on investments between 6% and 12%. In addition, the price of commercial properties can increase by double in a short time (3 to 6 years) as compared to residential properties where it would normally take between 7 years to 10 years. This however, is large depending on the area of the property.

4.       4-  Financing your purchase

Obtaining a commercial property loan is typically much harder than obtaining a loan for residential property such as apartment units, condominium units or houses. Banks are usually more selective when it comes to loan application for commercial properties. Even if you manage to secure a commercial property loan from the bank, the percentage of loan secured is much lower as compared to the loan obtained for residential properties where it can go as much as 90% loan financing. In addition, the interest rate of bank loan for commercial property is typically higher as compared to residential home loan. Therefore, do look around different banks as different banks will offer different types of loan offers, depending on the kinds of commercial properties that you intend to purchase.

However, do bear in mind that you will need to fork out a big initial capital as compared to residential property for 2 reasons: commercial properties are more expensive and lower loan financing from the bank. With bigger initial investment spent on a residential property, you can only the gain in revenue will outweigh the gain in cost.

In conclusion, commercial property in Malaysia can be a good investment option as well as commercial properties can offer a more rewarding income but with more risks. Whether or not to invest in commercial properties in Malaysia is depending on your property investment portfolio and how much risk you are willing to take. Make sure you look out for factors such as the property type, location and your economic conditions before you decide to make such investment. You certainly do not want to end up regretting in the future because of the wrong choice that you have made. After all, buying property involves a huge sum of money. Plan carefully to avoid getting into financial problems.

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