Will a Commercial Property be More Profitable Than a Residential Buy-To-Let in 2O23?

As the UK’s residential buy-to-let market becomes ever more constricted, WJM property solicitor Yasmin Myles argues that a simple swap to commercial leasing could provide a money hack for investors.

With higher mortgage rates, increased regulation, and an uncertain housing market making the residential property sector a challenge for investors, commercial property has fast become a great value opportunity.

In years gone by, it was well within reach for some to purchase a second home, let it out, and in return, earn some extra income. In recent years, the holiday lets market has also become increasingly popular for second homes.

Today, however, if you already own a property, the purchase of a second home would see you pay a large slab of tax in the form of Additional Dwelling Supplement in addition to Land and Building Transaction Tax (LBTT). There are also heavy regulation requirements to comply with for letting out residential properties, fees for a short term lets license if you are in the holiday home market, not to mention the necessary risk assessments, testing, and other documentation to be obtained before even applying.

These costs certainly add up, and set against the backdrop of a sector that has become increasingly turbulent in recent years, many landlords are now feeling the strain, leaving the market fraught with uncertainty.
However, for those who have the cash to invest and are prepared to consider a different avenue, there are far less expensive regulatory hurdles to overcome when letting out a commercial property. Crucially, it is legal for owners of commercial properties to devolve responsibility for regulatory compliance to their tenant.

There’s a common misconception that commercial property must be more complex and expensive to deal with than residential. However, this is simply not the case, and people are often surprised at how straightforward such an investment can be.

The market is broadly split into large-scale commercial developments such as shopping centres, industrial units and multi-storey office buildings, and smaller, single-let commercial premises like bakeries, salons, restaurants, and individual shops.

Often underrated, the commercial property letting business is a sound investment as investors do not need to pay Additional Dwelling Supplement, nor do they need a license to let the property out. Despite commercial properties having higher rental fees, a key factor is that a commercial tenant is likely to remain within a unit for a considerable period of time with a far longer notice period. Further, the statutory compliance documentation a residential landlord would be responsible for maintaining is largely passed down to a tenant under a commercial lease.
A huge part of the appeal for our commercial property clients is the ”full repairing and insuring” tenancies we often see, where tenants are not only responsible for maintaining the premises throughout the tenancy, but they also have more responsibility for ensuring the premises are left in the condition they were when they first took on the lease. This can ensure the landlord receives a stable income without having to fork out regular repair fees and having further foresight when it comes to vacancy risks.

Getting a commercial mortgage isn’t necessarily any more complex than securing a buy-to-let mortgage, especially with the rules around buy to let vs holiday lets. I would advise anyone looking for an investment property to look into the commercial options available rather than automatically going for residential as so many people tend to.