Pitfalls with commercial over residental.

[villageidiot]

Hi, i've been involved in residential letting for the past 15 years but am now looking to sell and buy into commercial property for a few reasons, mainly
1. low yield because of the recent increase in values (£325K property earning £800 per month)
2. The extra expense of repairs and maintenence.
3. It seems to be harder and harder to find good tennants every 6 or 12 months.
An inital look at the commercial property market gives the impression that this might be what I am looking for however I have no experience of this market. Are there any hidden pitfalls? Has anyone on the forum made this switch before ? and if so what are your experiences? Any general information on this subject would be greatly appreciated.
P.S. this is my first post on this forum.
Cheers.

[Editor]

There are pros and cons with commercial as there are with any other kind of investment - the secret is to really do your homework by reading all you can on the subject first, then thoroughly research the market you are buying into.
Generally commercial is more complicated and can be more risky than residential, but it can be very lucrative if you get it right. There's far more to it that I can go into here.
See this page on the site: http://www.landlordzone.co.uk/comprop.htm and also the books section:
http://www.landlordzone.co.uk/commercial_property.htm

[Tax Accountant]

My opinion is that a commercial is better than a residential for all the reasons set out in your query. Additionally, Capital Gains for a commercial property used for a trade normally attracts 75% reduction for business asset taper relief after only 2 years as opposed to non-business asset taper relief of 5% after 3 years and rising to 40% after 10 years ownership of residential property.

The only main point to bear in mind is that the value of a commercial property is largely dictated by rental value. Therefore, if the rental values are static for a property with long lease, the market value will also stay static.

It may be best to look for shops etc in secondary shopping areas which are vibrant.

[Editor]

Karongo,
Not sure what you mean with the business asset taper relief advantage - if you are running a business, fine, but an investor in the property cannot get this?
I agree with you on the other points. You need to be very careful where and what you buy in commercial because rental demand and a vibrant business area are crucial.
Yes, it's going to get tougher letting in the residential market as people expect more and more facilities and any downturn in rental demand will put landlords under pressure. I can remember a time when a small ad in the local paper attracted 30 desparate enquiries in the first day!
Commercial generally demands much less management time as leases are usually for several years and the fitting-out and maintenance are usually on the tenant.
However, letting can take longer and hence you can have longer void periods.
For a full review of the pros and cons see my seminar slides at:
http://www.landlordzone.co.uk/comprop.htm

[Tax Accountant]

By Editor:
'Not sure what you mean with the business asset taper relief advantage - if you are running a business, fine, but an investor in the property cannot get this?'

Reply:
Business Asset Taper Relief of upto 75% of the chargeable gains is available by reference to the use of the premises and it is not necessary to see who owns it. The rules have been changed a few times over the years. Initially it was not available to an investor at all. Then it was allowed to an investor who let to a limited company for use in their qualifying trade. The latest amendment allows relief to investors who lets to non-limited companies.

In other words, the legislation is encouraging availability of premises which are used for qualifying trades, even if this means allowing relief to investors.

Assume an investor who bought shop premises and let it to a shopkeeper who uses it for his grocery trade. After letting for at least 2 years, the investor decided to sell and makes a gain of say £30,000. He will get 75% taper relief and reduce his chargeable gains to only £7,500. This is covered by his annual exemption and therefore there is no CGT to pay.

I hope this answers your query. If not, please let me know.