Post about "Property"

The Differences Between Commercial and Residential Property Investment

When you invest in residential property you are essentially dealing with people. When the rent is late, you have to deal with a person – the tenant. If you feel the property is not being looked after properly, you will have to deal with people who may have a different opinion from you.

With commercial property, you are essentially dealing with contracts. If the rent is not paid on time, then the contract (lease agreement) stipulates a series of remedies that the landlord can take. If the property is not kept up to a certain standard, then the contract may stipulate that you can send in a commercial cleaner and send the bill to the tenant.

Generally, governments around the world have countless rules governing the renting of property to residential tenants, which override anything that you may put in your rental agreement. For example, in the UK, if a tenant is behind in their rent, you cannot just evict them. There are all sort of protections in place so that the tenants will not be exploited. You have to allow them to fall behind in rent for at least 30 days before you can start eviction proceedings.

With commercial property, what is in the lease contract is generally what goes. Many commercial leases have a clause in them that stipulates that if the rent if late by more than a week, then penalty interest will be applied to the amount of rent outstanding. If the tenant still has not paid the rent a certain period of time thereafter, then you have the right not only to change the locks and take your premises back, but also to seize all the tenant’s fittings, furniture and equipment on the premises, and to sell them to recover the rent owing. Your rights as a commercial landlord are far stronger than those as a residential landlord.

With commercial property, the tenants usually derive their income at your premises. Therefore they have a vested interest in keeping your property in good condition. With residential tenants, there is not the same drive to maintain your property, let alone improve it. With my commercial property, I spent thousands of pounds changing the business from a men’s hairdressers (which it had been for the previous 30 years) – into a real estate business. In fact, for the first couple of years, we often had men coming to the property and looking inside expecting to have their haircut.

With a commercial lease, the tenants often paint their premises every couple of years so that it will be attractive to customers. In fact, in a commercial property, the tenant is responsible for whatever maintenance repairs occur. So if there is a plumbing problem in a commercial property, it is up to the tenant to bring in his own plumber and to be responsible for whatever bills are presented to him. In a residential property, the tenant is entitled to call the landlord or the management company – they are compelled by law to fix whatever repairs are necessary.

Another fundamental difference between residential and commercial property concerns the typical length of the lease. With residential properties it can be on a month-to-month basis, but is rarely longer than one year. Commercial properties, on the other hand, are generally leased for many years at a time. From the tenant’s perspective, it gives their company or business the security of the same premises to work out of. Banks like long-term leases as well: the longer and stronger the lease, the more willing they are to lend money on the property.

In some countries a tenant cannot rent the premises with a lease that is under 5 years. There is an upside to this and a downside to this. The upside is that his business is secure in that location for at least 5 years. He cannot be asked to move. The downside is that if times are bad, he might be able to pay his rent and he has no wiggle room to get out of that lease. So in the end he possibly could lose everything. He could lose whatever deposits he has put down, he could lose his furnishings, his equipment. He could theoretically lose the essence of his business.

So far, you can see there are a lot of advantages of commercial properties over residential ones.

To summarise the main categories of commercial property:

1. Retail: shops or any building where passing trade or the general public are invited
2. Office: commonly found with retail or alone, and often above the retail areas on the ground floor
3. Industrial: places where things are manufactured or services provided – but not necessarily where the general public are walking past.

Commercial property is much more specialised than residential and it may be more difficult to find a tenant in the area of specialisation catered to by your building.

Typically banks will lend you up to 80% of the value of the property on a residential investment. However, with commercial property usually the maximum is about 60%.

The biggest advantage of residential property over commercial comes when your property is empty. If you have a house where the tenants have just left, if you have bought it in a good location and the market is reasonably active, then you should be able to find tenants quite quickly. Generally even in a slow market, the only reason why a residential property sits empty for a long time is because of the rental price. If you drop your rent by 10% or more, you will usually get a tenant. However, this downturn economy has vastly affected both residential and commercial properties. Workers who have been made redundant find that they cannot pay the rent. Many commercial properties are suffering because their tenants have been forced out of business.

With residential property, if your tenant has been laid off or fired, it may take you months to be able to evict him let alone find another tenant. In a commercial property, you are entitled to keep his deposits, fittings, equipment and furnishings, but that still doesn’t give you an income for that property. And right now there are many commercial properties that are going bankrupt. So my best advice is that in this downturn economy, that while there may be numerous opportunities for investment, be aware that there are just as many situations where you could lose a great deal of money.

Let’s look at commercial property that has been empty for 3 months or 3 years, then the problem may not be because the rent is too high. Even if you were to slash it in half you still may not find a tenant.

The reason for this is simple. Just about any residential property on the market has all that is required for someone to live in it. However, when it comes to commercial property, the requirements vary hugely from tenant to tenant. For example, when a dog food cannery becomes vacant, it may not be simply a matter of reducing the rent to find a tenant. No matter how much you drop the rent, no photographer looking for a studio is likely to settle for the dog food cannery. No shoe shop that relies on passing foot trade will want the top floor in an office tower, no matter how good the view or how reasonable the rental.

To summarise the differences between residential and commercial property:

Tenants have little interest in maintaining or improving your property
Leases tend to be short
Tenants contact the landlord for minor problems
Governments tend to legislate to protect tenants rights
Banks lend up to 80% of the value
If the property is empty, it is usually easy to find a new tenant
You deal with people

Tenants have a strong vested interest in the upkeep of your property
Leases tend to be long
Tenants tend to fix minor problems
Governments tend to leave you alone
Banks will lend only 50-60%
The appraised value when tenanted may be 2 or 3 times the value when empty
If the property is empty, it may be difficult to find a new tenant
You deal with contracts, not people

If you were coming to me for property investment advice and you didn’t know which would be better for you: to buy a house or to buy a piece of commercial property. The first thing I would say to you is: research, research, research commercial property. Find out everything you possibly can about being a landlord, about tenancy agreements, about your areas of responsibility, the tenant’s areas of responsibility, and when you have spoken to a number of commercial property landlords, and gotten to understand the business really really well, then I would look for a group of investors who would go in on a building with you.

I would also look for a syndicate – you would be just a small part of that syndicate. Your financial obligation would be very small in comparison if you had just gone into it yourself or with one or two other people. A syndicate usually implies a large group of investors. The upside is that you don’t have to have much of a cash outlay if you invest with a syndicate. The downside is that you don’t make as much money if you invest with a syndicate. But your risks are greatly reduced, which is why people have a tendency to look for syndicates. When you have a syndicate investing in residential property, a lot has been written about landlords – that the landlord or landlords plural, are just soulless people out to gouge as much money out of their tenants as possible, making the fewest number of repairs they can get away with. The laws governing commercial property makes that condition less likely – mainly because most of what we are talking about is the tenant’s responsibility.

Car Financing Under Islamic Banking

Current Scenario: The auto industry, especially in the United States, is in a downward spiral alright, and no one has a clue what’s in store for this industry. The same trend is noticeable in other parts of the world, including Japan. With the biggest names in the auto world like General Motors, yes GM, and Toyota bleeding non-stop, it is anyone’s guess how long these venerables of the auto industry can hold out against the market elements.

Time for Bargains: For the consumers though, especially those on the lookout for a good deal, many bargains are to be had for the asking! This may be the best time to strike the iron i.e. buy a Car! And there is any number of financing options available to bring that dream car of yours into the garage!

The Islamic Option: In this article, we shall take a look at the Islamic financing option for purchasing a car. Financing for purchase of cars under Islamic Banking is done under the contract of ‘Murabaha’. Simply speaking, this is a cost plus profit mark up contract.

Typically, the Islamic Bank or financial institution would have certain criteria to evaluate your creditworthiness and eligibility for a car loan, having regard to your income either from salary, or business i.e. your occupation, and other sources; your monthly expenditures, statutory payments etc, and finally your net income.

Now, suppose after going through the above process, the Bank gives you the good news-that you are indeed eligible for a car loan of USD 25,000.00 that you had asked for, to buy your dream machine. The next step would be to work out the profit mark up of the Bank on the loan amount. Suppose this works out to USD 5,000.00. That means the total cost of this deal, for you, is USD 30,000.00. Of course, the Bank would have factored its profit mark up while calculating your eligibility amount for the car loan. The other variation in the above case would be that the cost of the car is USD 20,000.00 and the profit mark up USD 5,000.00 or less as the case may be.

Apart from the above, other details to be worked out include:

  • Down Payment: Some Banks would require you to make a down payment for the car-that would increase your stake in your dream car, as well as bring down the amount/number of installments payable by you.
  • Repayment: The loan amount, plus the profit mark up, put together, would be divided into equal number of installments, agreed upon, say, 60 or 72 as the case may be, and you would be required to repay the same within the stipulated time. Some Banks offer a moratorium on repayment, that is, they allow you to start repayments after, say, two or three months after disbursing the loan. Some other Banks also offer to rework the installments after a part of the loan is repaid. Say you have repaid 12 installments. The Bank then works out a new EMI on the balance of the loan amount remaining after payment of the 12 installments. Upon full repayment of the loan, your car becomes really yours!
  • Add-Ons: In the increasingly competitive environment that the Banking industry is functioning, it is not unusual to get a few add-ons with your car loan – zero balance account, free/concessional insurance for the car, free advisory services in respect of the car loan, as well as other services on offer by the Bank, etc. Do avail of the freebies!
  • The Delivery!: Assuming that you have already identified your baby, that is your dream car, and the place that you wish to buy at, it is now the turn of the Bank to buy the car from the dealer on your behalf, and have it delivered to you!

Go on and Enjoy your Drive! Of course, there are no free lunches. Please do your due diligence before deciding to take a loan. And don’t forget that seat belt! HAPPY DRIVING!