Difference Between Residential and Commercial Property Management | LBPM

The Key Differences Between Residential and Commercial Property Management

The Key Differences Between Residential and Commercial Property Management

Premier Property Management – The LBPM Way | Los Angeles County

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At LBPM, our real estate experts and property management specialists are dedicated to providing quality tenant and vendor experiences that increase the ROI and value of your properties. Whether you’re a residential or commercial property owner, you can count on the LBPM team to help grow your profits and portfolio!

Are you looking to start investing in and/or managing properties? For those who are new to investment properties and property management, we’ll break down the main differences between residential and commercial property management, so you can choose the investment that’s right for you!

If you’d like to talk with one of our real estate specialists or property management professionals about potential listings or services, LBPM offers free consultations and quotes as a convenience to our clients in Los Angeles County. Call us at 818.918.3967.

Residential Vs. Commercial Properties

Besides the obvious difference between public and private use when it comes to residential and commercial property management, you might be wondering the key distinctions for day-to-day operations for both property types. Before even looking at potential investment properties, it’s important to know what to expect and how to successfully manage your residential and commercial units according to their unique demands. Without further ado, here are the key differences between residential and commercial properties!

1. Tenant Expenses:

Aside from the base rental fee, those leasing a commercial building or space are required to pay some or all of the expenses in conjunction with real-estate ownership. These types of expenses (also known as the “three nets” or NNN) include property taxes, insurance coverage, and maintenance fees. Also, it’s important to keep in mind that there are several types of commercial leases, such as:

Triple Net:

A triple net lease requires a commercial property tenant to pay the net amount for all three costs–real estate taxes, building insurance, and common area maintenance (CAM) fees.

Modified Net:

This commercial agreement is a compromise between gross lease and triple net. In this case, the property manager and tenant will agree to split the maintenance expenses, while the tenant remains responsible for the real estate taxes and insurance.

Gross Lease:

More often than not, a commercial property landlord with a gross lease will collect the fixed rental fees and pay for all of the expenses out of them. Typically, these agreements usually have many clauses that may increase the monthly rental rate and fees to cover any increased taxes or insurance for the landlord.

Percentage Lease:

Commonly implemented for commercial properties dedicated to retail, such as shopping centers and malls, these agreements require a lessee to pay the base rent as well as a percentage of their sales volume. Overall, lease agreements for commercial properties tend to be much more complex compared to those designated for residential properties or units. When it comes to financial reporting for your commercial property, owners will need to perform an annual recalculation based on the money received and actual expenses in the event of collecting fixed amounts for monthly CAM fees. On the other hand, residential properties have rental rates that are fixed and utilities are charged and reported based on consumption.

Either way, it will be important for both residential and commercial property owners and managers to have the software necessary to calculate and record the correct amounts for savvy financial reporting!

2. Onsite Management + Maintenance

For both residential and commercial properties, onsite management and maintenance are crucial for success. This remains true whether you’re managing an apartment complex, large office center, or shopping mall. Having an onsite manager will allow for quicker response and resolution when it comes to tenant requests, repairs, emergencies, and more. In certain U.S. states, commercial properties require onsite managers. To keep track of all maintenance requests and orders, it’s important for both residential and commercial property managers to utilize a system that’s user-friendly for tenants, managers, and owners. Managers ought to have access to tracking all ongoing tasks, viewing work schedules, and changing statuses. For tenants, the interface and portal should make it clear when repairs and/or maintenance will be completed, in addition to the status of any task.

 

Property Onsite Management and Maintenance

3. Responsibilities:

Despite the fact that commercial property owners typically encounter higher costs and more complex lease agreements, the trade-off is that they tend to have fewer responsibilities than residential property owners and managers. With residential properties and units, it’s up to the owner and manager to maintain a habitable residence to avoid civil lawsuits. More often than not, commercial properties are for business use, and the scope of landlord responsibilities is a lot lower since offices, industries, retail spaces, and/or warehouses have designated hours of operation. This means that commercial property owners and managers are less likely to receive midnight calls for fixing things like broken toilets or leaking pipes or dealing with complaints like loud music from neighbors.

4. Leasing:

As mentioned earlier, it’s far easier to rent residential units or brokerage services for residential leases. This is typically because residential agreements have less conditions and are easier to renew, while commercial leases are more complicated. Sometimes, commercial properties and spaces might have difficult extension options, and their monthly rates are reviewed annually–in which prices are commonly increased by the CPI or some other fixed index. Also, commercial lease agreements are harder to break because they will need to include more termination clauses.

5. Community Involvement:

It’s also important to consider in the event of ownership of multiple retail spaces or shopping centers that retail property management owners and managers will need to consider the wider public and the community to be successful. Unlike residential property owners and managers that maintain standalone housing, commercial properties are commonly public areas that interact with an immediate community and higher foot traffic.

Legislation: Last but definitely not least, there are different policies and permits that different types of properties must adhere to.

Residential property owners and managers will need to be able to navigate tenant/landlord laws and legislation, including the following:

  • Residential Tenancies Act 1986 (RTA)
  • The Building Act 2004
  • The Building Code
  • Housing Improvements Regulations 1947
  • Residential Tenancies (Healthy Homes Standards) Regulations 2019

However, because commercial tenants typically have claim over the property during their lease and tenancy, there are differences in expectations and compliance. A commercial property owner will need to follow the guidelines set out by the Property Law Act 2007, which governs the relationship between commercial property owners and their lessees. It’s also important to note that commercial leases often require professional legal supervision and are based on a Deed of Lease. Commercial property leases tend to be more complex and detailed with difficult extensions to choose from because a commercial tenant will typically occupy the space or unit for a much longer time frame than a residential tenant. There are some commercial leases that cover up to 30 years of tenancy!

Property Management Frequently Asked Questions (FAQ)

Wondering whether or not to invest in residential or commercial property? Here are some of the most common questions our property management company and real estate experts receive from first-time and emerging real estate investors! At LBPM, we are proud to provide commercial brokerage services for owners, tenants, and buyers.

Property Management Frequently Asked Questions

What is the #1 difference between commercial and residential properties?

Arguably, the main difference between investing in commercial property as opposed to residential real estate is the clientele–a.k.a. tenants. Residential property is leased to consumers in the form of individuals, couples, and/or families, whereas commercial property is designated for businesses.

Can a commercial property be converted into a residential one?

Commercial properties can, in fact, become residential spaces, but this process will require planning permission(s), permits, and compliance with a different set of codes. Though not common, there are unique cases in which the sale of a commercial property will grant permission for this conversion.

Are commercial properties more valuable than residential homes apartment buildings?

On average, commercial properties are far more expensive than residential properties. They also cost more to maintain due to their larger scope. For investors with the money to risk, commercial properties can also lead to far higher returns than residential properties that are rented out or sold.

One of the main reasons why property owners will choose to invest in commercial over residential rentals is the earning potential. Commercial properties generally have an annual return of 6 to 12 percent off the purchase price (depending on the area and market of course), whereas residential single-family homes will yield 1 to 4 percent at best.

How do I qualify for a commercial property mortgage?

In order to qualify for a commercial real estate loan, a small business will need to occupy at least 51% of the building. In cases that don’t meet this requirement, owners or buyers ought to apply for an investment property loan instead, which is also appropriate for rental properties.

What is the best down payment for a commercial property?

For commercial properties, the maximum amount tends to be 65 to 85 percent of the real estate’s loan-to-value (LTV) comparison with a down payment that covers 15 to 35 percent of the fair market value of the property.

From residential to commercial services, feel free to contact LBPM for all of your Los Angeles property management needs. Call us today for a free consultation and evaluation of your property at 818.918.3967.

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