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Differences between commercial and residential property management

The real estate market is one of the most vital sectors in Dubai’s economy and includes the commercial and residential real estate markets. The two markets differ in terms of characteristics, elements, and implications for investors and owners.

In this article, we’ll highlight the key contrasts between commercial and residential real estate markets.

Any sort of real estate can be a great rental speculation opportunity. There are many contrasts between residential and commercial property management, which are more complex and risky but more profitable.

Commercial vs. Residential Property Management

1. On-site management & maintenance

Large office buildings or shopping centers require on-site managers who can handle tenant requests and other difficulties. In some countries or US states, this is legal. To keep track of all requests and work orders, you’ll need a system that’s easy to use for the manager and the tenant. A manager should be able to easily track all ongoing tasks, view the work schedule, and adjust their statuses.

On the tenant’s part, it should be clear when and what will be done and when any work is expected to be completed. When you rent an apartment, you can have maintenance vendors, which tenants usually deal with directly without interruption from property management.

2. Initial rental investment

A residential property investment is generally more affordable financially and easier to understand than a commercial property investment. Indeed, commercial transactions are often more expensive and complicated, and the risks are higher. The bank also requires more contributions, and the loan periods are shorter. However, it is important to remember that financing depends on the location and that the maintenance of the property generally costs more in particular, because of the facilities to accommodate customers.

3. Duration of lease contracts

Commercial leases are much longer to ensure the stability of the activities of commercial tenants. They have a minimum duration of 9 years. Termination may also occur at the end of each three years (3, 6, and 9 years), provided that 6 months’ notice is given. The lessor can also require a review of the rent every 3 years. Its increase is also capped and cannot exceed the variation in the quarterly construction cost index or the quarterly commercial rent index.

The advantage of this type of lease is that it offers better financial security, provided that:

  • Choosing the Right Location
  • Carefully assess the rental vacancy risk (lower than residential properties)
  • Estimate the rent correctly
  • Select the tenant carefully by carrying out a financial analysis of the lessee’s business.

The disadvantage of long-term leases is termination. It is simpler not to renew a short-term lease than to break a long lease.

The duration of residential leases is often one to three years when they are vacant leases. The lease is generally concluded for one year and can be renewed for furnished accommodation. However, depending on the tenant’s situation, it is possible to sign shorter leases. The notice period for leaving the accommodation is also very short.

4. Distribution of work and maintenance

In residential rental management, landlords are generally responsible for most routine repairs and maintenance of the property. This is not the case in commercial real estate management. Responsibilities for work and maintenance can and are often transferred to tenants. They are required to maintain the space according to the terms of the lease, at least for small jobs.

5. Potential yield

The best reason to invest in commercial real estate rather than residential real estate is the income potential. The return on commercial real estate is often higher than the return on residential real estate due to the higher risk.  The yield depends on multiple criteria, but it is 2 to 3 times higher than residential property investment. Rental investment for residential property use can yield 1% to 4%, while a commercial property investment can generate an annual return of 6 to 12 percent depending on location, market, and other economic factors. 

Although more lucrative, as indicated, the rental management of commercial real estate is more complex. It is highly recommended to get professional help to reduce your risks and increase your profits. Mirador Real Estate, our real estate agency in Dubai, is ready to help.