Property portfolios offer considerable benefits to investors. While one property will generate some steady cash (or profit through capital growth), multiple properties will offer several income streams; which means better money-making potential, and longer-term financial security.

There are many different types of property for you to choose from. Some investors choose to diversify, while others specialise in one specific asset class. Here’s a comprehensive guide to help you decide which approach is right for you.

Commercial or residential?

When it comes to building a portfolio, there are two broad categories – commercial or residential. But which one is most suited to your needs? This is dependent on a number of factors, including:

• In some places, commercial properties will offer a better rental yield. In others, buy-to-let might be a better option.
• Current income vs long-term investment. Do you need your portfolio to make money for you now? Or are you more focused on generating a ‘retirement pot’ for the future?
• Budget. Most importantly of all, you’ll need to be realistic about what you can afford. It may be that you want to ‘start small’, then sell the property on and reinvest the proceeds into a larger premises / house. Alternatively, you might want to invest in a cheaper area, with a view to extending your portfolio into more lucrative locations later on.
• Involvement. Will you be hands-on in terms of management / dealing with tenants etc? Or would you rather a low-maintenance portfolio that doesn’t require much input?

What’s the difference, in investment terms?

Here are a few key differences between the two:

Residential

• Is usually buy-to-let
• Income potential is dictated by tenant demand / surrounding area / local amenities etc.
• Is sometimes seen as the more ‘straightforward’ portfolio option

Commercial

• Is usually more impacted by the economic climate
• Is less ‘personal’ – commercial premises are typically managed by a professional agency
• Usually requires less input in terms of day-to-day management
• Is typically more expensive to invest in

Residential property asset class – more information

Many investors choose to focus solely on residential properties. Indeed, according to the BPF, it’s the UK’s biggest investment asset class, and the best performing too (based on total returns).

There are many advantages to investing in residential property. These include:

• Great long-term capital growth. Houses and apartments have been rising in value in virtually every part of the country, and are likely to carry on doing so in the future.
• Lower-risk. Residential properties are also regarded as a lower-risk option than other forms of investment; for example, stocks and shares.
• Opportunity to diversify within the class. Some landlords choose to diversify their tenant demographic – for example, supplying houses for students in one area, then for young professionals in another.
• Reduced risk of voids. Providing that landlords invest in the right area (and in a good property), there’s not much risk of the house sitting empty for extended periods of time.
• Lots of demand. Numbers of tenants in the UK continue to grow, and there’s plenty of demand for rented accommodation.

However, there are some drawbacks too, such as:

• Lower yields. While there are a few ‘landlord hotspots’ in the UK, yields tend to be less than for other property asset classes.
• Tenant issues. Tenant problems can arise, which causes undue stress. One of the simplest ways to combat this issue is to work with a property management company.
• New legislation. Recent regulation and policy changes have made being a landlord slightly more complex (and expensive). However, it’s still relatively straightforward to make a good profit from residential properties.

Different types of commercial property

There are multiple types of commercial property classes. The three most popular ones are:

• Office
• Retail
• Industrial

We’ll examine these in greater detail, and redevelopment investments too.

Offices

An office can encompass a wide range of premises; from small, single-tenant properties, to largescale buildings, designed for multiple companies to lease. They are usually found in urban locations (towns and cities), though there are exceptions to this rule.

Pros

• Longer term leases – which means not having to search for new tenants so frequently
• Reasonable yields (particularly in well-established business hubs)
• Less proactive management required

Cons

• The economy tends to impact offices more than residential property investments
• If an area becomes suddenly less popular for businesses, finding tenants might be harder
• You’ll need to cover service charges if the building is vacant

Retail

Again, this asset class incorporates lots of different styles of property – from a tiny corner-shop to an enormous shopping centre. Some premises may be customised to suit a specific business.

Pros

• Longer-term leases for better peace of mind
• Tenant pays for fees relating to the premises (e.g. repairs, maintenance etc.)
• Hands-off approach – no active involvement required
• Predictable, reliable income

Cons

• Economic downturns can swiftly ruin retail companies, which means you many lose a tenant
• Larger initial investment – retail premises are usually more expensive than residential properties (and sometimes offices too)
• Some retail premises are tailored to cater to one type of business. This limits the number of tenants your property will appeal to

Industrial

This asset class covers all properties used for industrial purposes. Again, there’s a lot of variation here; from small units to large warehouses. The bigger premises tend to be situated close to main roads, which is advantageous for import / export companies.

Pros

• Long-term leases
• Industrial premises continue to be in high demand, which is good for capital growth when you sell
• The larger premises are easy to adapt to different business types – which broadens the range of companies you’ll appeal to

Cons

• Some of the smaller premises are customised to suit a specific kind of business, which limits your market
• Industrial businesses are more likely to be affected by global trade – if something impacts international export or import, this will have a knock-on effect, and you may lose your tenant as a result

Redevelopment opportunities

Redevelopment, while not strictly speaking a property asset class, is a popular way to swiftly grow a portfolio. In simple terms, the process involves the purchase of either a commercial or residential building in need of improvement, redeveloping it, then (usually) selling it on for a profit.

Redevelopment offers a lot of advantages:

Pros

• It offers speedy, solid returns
• There are opportunities to keep costs down, if you’re familiar with the redevelopment process
• You can develop the property to suit your plans for the future

Cons

• Costs can spiral if you fail to manage the project properly
• There can sometimes be unexpected expenses to pay, which eat into your profit margins
• The market can change, reducing the value of your property

What properties are right for your portfolio?

Ultimately, deciding which property asset classes to invest in depends on your unique circumstances, and your investment goals. RIB have considerable expertise in helping clients to build a successful portfolio (diverse or otherwise) – to find out more, get in touch with us today on the details below.