During the recent lockdown period, I enjoyed a few online debates with Andrew Roberts who runs the well attended Great Property Meet, near Rugby in the Midlands. Andrew is an experienced investor and in our online debates he very sportingly took up the position of the commercial landlord versus myself picking up the argument as to why residential is the way forwards, and also the position of flipping properties versus holding onto them which was my corner.
To declare my biases up front, residential represents 90-95% of what I buy (versus commercial) and holding represents 90-95% of what I do with properties, always preferring to hold on rather than sell as a rule of thumb.
In the last edition of Property Investor News, I discussed here the relative risk of different strategies within residential, and also put a benchmark in there for commercial property. For those selling courses on commercial property, or for the commercial property evangelists, significant attention is put on the lack of effort managing assets that are on FRI leases, and the nature of the high net returns. Studies have shown that with residential over time, all costs and returns considered, returns around 10-12% more per annum (just under 8% versus just over 9%) than commercial. These numbers were from years ago, measured over a couple of decades, and should therefore not be considered as realistic forecasts for the years to come simply because we live in a very low yield, low return environment these days. The studies mentioned considered all costs and also all returns including capital growth, but these returns were without using leverage/mortgages.
The residential side of the debate also needs to include the consideration that higher leverage at cheaper rates is available. It has been possible in recent years to obtain up to 85% leverage against residential investment properties, versus 75% being the top end for commercial. Anecdotally, I can also confirm that I have seen commercial properties trading with some regularity at 30-50% of a value they once traded at - such a thing with residential investing in my experience, is very very rare indeed. Commercial property has higher volatility which often means that those with the skills to pick the right areas, niches, covenants and the likes are very well rewarded. Conversely, those who are not so clued up can lose more money more quickly. Just last year I bought a commercial site with a business partner at 65% of the price it had previously traded at seventeen years ago back in 2003. That is not something I see happen in residential.
I personally feel 75% on a ‘vanilla’ single let represents very limited risk, and as soon as you get into the 60%’s for LTV on resi there is a very small amount of risk for
the borrower (and the lender). With commercial, I would say that that roughly translates to 60% being limited risk, but you need to get into the 40%’s to be taking a very small amount of risk as a borrower or lender on a commercial unit. To my mind, there is far more risk at 75% LTV on a commercial property than at 85% on a residential - but of course, this is just my opinion and others will disagree. Both are highly leveraged positions - on that, I’d hope we could agree!