Commercial or residential property: which is the better investment now?
Residential property is easier to buy, easier to sell and more familiar. Commercial property has longer leases, tenants who usually pay for repairs and insurance, and far less regulation of the landlord and tenant relationship. Since 2024 the balance has shifted: the Renters' Rights Act 2025 rewrote residential tenancies from 1 May 2026, and residential landlords face energy and tax rules that commercial landlords largely do not.
Last reviewed September 2026.
Start with the obvious differences
A residential tenancy is a person's home. A commercial lease is a business arrangement between two companies. Almost every difference below flows from that one fact, including the reason Parliament regulates one far more heavily than the other.
The practical consequences are these. Residential tenancies are short and, since May 2026, open-ended, with the tenant free to leave on two months' notice. Commercial leases in England commonly run five to fifteen years. Residential landlords repair the building; commercial tenants usually do, under full repairing and insuring terms. Residential rent is monthly and residential arrears are dealt with through a heavily prescribed process; commercial rent is traditionally quarterly and the remedies are contractual.
Side by side
| Residential | Commercial | |
|---|---|---|
| Typical lease or tenancy | Periodic, tenant can leave on 2 months' notice | 5 to 15 years, often with fixed reviews |
| Who repairs and insures | Usually the landlord | Usually the tenant, on FRI terms |
| Regulation of the relationship | Extensive and increasing | Light; largely a matter of contract |
| Ending it | Only on a statutory ground, through the court | On the lease terms |
| Entry price | From roughly £100,000 in much of the North | Rarely below £1m for a decent let building |
| Ease of sale | Deep buyer market, weeks to months | Thin buyer market, months |
| Held in a SIPP or SSAS | Generally no, and penalised | Yes, one of the few real assets that can be |
| Finance costs deductible | No, replaced by a 20% tax reducer | Yes, deducted in full |
| Energy standard | EPC C equivalent by 1 October 2030 | EPC E now; EPC B from 2031 for buildings over 1,000 sq m |
What the Renters' Rights Act changed
The Renters' Rights Act 2025 received Royal Assent on 27 October 2025 and its main provisions took effect on 1 May 2026. It is the largest change to residential letting in a generation, and any comparison written before it is out of date.
Assured shorthold tenancies and section 21 are gone. All assured tenancies are now periodic. There is no fixed term and no no-fault route to possession. A landlord who wants the property back has to establish a statutory ground.
Getting the property back takes longer and costs more. The two grounds most relevant to an investor, moving in yourself (ground 1) and selling with vacant possession (ground 1A), cannot be used at all in the first twelve months of a tenancy, need four months' notice, and are followed by a twelve-month ban on marketing or re-letting the property. In practice, deciding to sell a tenanted house can mean sixteen months between the decision and vacant possession, assuming the tenant leaves when the notice expires and the case never reaches a courtroom.
The arrears threshold has risen. The mandatory rent arrears ground now requires at least three months' arrears, up from two, or thirteen weeks where rent is paid weekly or fortnightly.
Rent can be increased once a year, by a section 13 notice giving at least two months' notice, to the market rate. The tenant can refer it to the First-tier Tribunal, which will determine the market rent but cannot set it above the figure the landlord asked for.
Several practices are now prohibited. Accepting more than one month's rent in advance. Accepting offers above the advertised rent. Refusing a pet request unreasonably. Discriminating against prospective tenants because they receive benefits or have children.
Penalties are meaningful. Civil penalties run to £7,000 for initial or less serious breaches and up to £40,000, or prosecution, for serious or repeated ones.
More is coming. A private rented sector database and a landlord ombudsman scheme follow, with the ombudsman not expected to be open for business until 2028, and the Decent Homes Standard is due to be extended to the private rented sector in the middle of the next decade.
None of this makes residential letting unviable. Plenty of good landlords will carry on and do well. It does mean the job now carries administrative and legal risk that it did not carry five years ago, and that the exit from an individual property is slower and less certain than it used to be.
Tax: be careful which changes apply to whom
This is where most comparisons go wrong, in both directions. Some recent changes hit residential landlords specifically. Others hit anyone with property income, including us and our clients. It is worth separating them.
Applies to residential only. Finance costs on a residential letting have not been deductible from rental profit since 2020. Instead there is a basic rate tax reducer, currently 20%, which rises with the property basic rate to 22% from 2027/28. For a higher rate taxpayer with a mortgaged buy-to-let, that is the single most expensive feature of the tax system, and it can leave a landlord paying tax on a profit larger than the one they actually made. Commercial landlords still deduct their interest in full.
Applies to residential only. The 5% higher rates surcharge on additional dwellings, on top of standard residential stamp duty land tax. A company buying a single dwelling for more than £500,000 can face a flat 17% charge, though letting to unconnected tenants as a property rental business is one of the reliefs from it. Commercial stamp duty is charged at 0% up to £150,000, 2% from £150,001 to £250,000 and 5% above that, with no surcharge, which on a £1m building is £39,500 rather than the £71,250 a second home at the same price would attract.
Applies to residential only. A pension generally cannot hold residential property without significant tax charges. Commercial property is one of the few real assets a SIPP or SSAS can hold.
Applied to residential only, and now gone. The furnished holiday lettings regime, with its interest deductibility and capital allowances, was abolished on 6 April 2025.
Applies to both. From 6 April 2027, income from a UK property business is taxed at new property income rates of 22%, 42% and 47%, two percentage points above the equivalent general rates. This was enacted in the Finance Act 2026, and the definition covers the profits of a UK property business generally, so it catches commercial rents as much as residential ones. Anyone telling you this change is a residential problem has not read it.
Applies to both. Making Tax Digital for income tax began on 6 April 2026 for anyone with qualifying income above £50,000, falling to £30,000 from April 2027 and £20,000 from April 2028, with quarterly updates to HMRC.
Applies to both. Capital gains tax on disposals by individuals is charged at 18% and 24% depending on the band, with a £3,000 annual exempt amount. Residential property no longer carries a higher rate than other assets; the rates were aligned in October 2024.
Tax depends entirely on personal circumstances, and this is a summary rather than advice. Take proper advice from an accountant before acting on any of it.
Energy efficiency: the gap is wide, and widening
Both sectors face minimum energy efficiency standards, but they are now on very different tracks.
For residential, the Warm Homes Plan published on 21 January 2026 confirmed that all privately rented homes in England and Wales must reach an EPC C equivalent by 1 October 2030, with a cost cap of £10,000 per property and government estimates of average spend around £5,400. There are exemptions, including a ten-year exemption once the cap has been spent, and an adjustment for properties worth under £100,000. The metric itself changes from October 2026 to a multi-metric system led by fabric performance.
For commercial, the current minimum remains EPC E. In its interim response on 18 June 2026 the government confirmed that non-domestic rented buildings over 1,000 square metres will need EPC B from 2031, where cost-effective, that buildings under that size stay at EPC E, that the previously proposed interim EPC C milestone for 2027 will not go ahead, and that the seven-year payback test and existing exemptions remain. It still needs secondary legislation.
The difference matters most for an older building. A Victorian terraced house let at £900 a month has to reach EPC C by October 2030 and the landlord pays for the work. A small shop under 1,000 square metres has no new obligation beyond EPC E, and where works are needed the lease often puts a share of the cost on the tenant.
Where residential is genuinely stronger
We would not be doing our job if we only listed the drawbacks.
You can sell it. There is a deep, liquid market of owner-occupiers and investors for an ordinary house. That is worth a great deal, and it is exactly what commercial property, and a syndicate share in particular, does not offer.
You can start small. A house in much of Yorkshire costs a fraction of a commercial building, and you can buy one on your own without qualifying as a certified investor.
Demand is not going away. People need somewhere to live in a way they do not need any particular shop. Long-run housing undersupply in this country is real, and it underpins values.
Capital growth has historically been strong, particularly in the South East, though past performance tells you nothing reliable about the future.
It is understandable. You can see it, judge it, and manage it yourself if you want to.
The honest way to put the comparison is that residential has become a more operational business and less of a passive investment, while commercial has stayed roughly where it was. If you enjoy the work, have the time, and buy in the right place, residential still works. If you want income without becoming a landlord in the day-to-day sense, the case for commercial has strengthened relative to residential over the last two years, largely because of things done to residential rather than anything done for commercial.
Why we build residential and hold commercial
Our own position follows from that. We develop residential schemes, take them through planning and construction, and sell the finished homes. The return comes on completion. We do not hold them and let them, and the regulatory picture above is a good part of the reason.
What we buy and hold for our clients is commercial, in York and across the North, and it is bought with cash rather than bank debt. Long leases to business tenants who repair and insure the building produce the quarterly income our clients are looking for, and it can be held in a pension, which a house cannot.
That is a description of how we work rather than a recommendation. Commercial property carries its own risks, set out plainly in our guide to the risks of commercial property investment: tenants fail, buildings fall empty, values fall, and a syndicate share can be hard to sell. Neither sector is safe, and neither is right for everybody.
If you are weighing the two
Ask yourself how much involvement you actually want, and be honest about it. Ask when you might need the money back, because that question alone rules out a great deal. Ask whether the investment will sit in a pension. Ask who pays when the roof fails. And ask what has to happen for you to get out, and how long that has taken other people in practice.
Then take independent financial advice, and separate tax advice, before you commit to either.
Sources for the figures on this page
- Guide to the Renters’ Rights Act
- Warm Homes Plan: minimum energy efficiency standards for privately rented homes
- Minimum Energy Efficiency Standards in the non-domestic private rented sector: interim response
- Finance Act 2026
- Stamp Duty Land Tax rates
- Capital Gains Tax rates
Legislation and thresholds in this area have changed repeatedly. Figures were correct at the date above; check the current position before relying on any of them.