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23 NOVEMBER, 2022
Over the years, investing in properties has been a standard method of diversification. Enjoying significant returns due to a secondary income is one of the key benefits of real estate investment.
Real estate investing has many key advantages, such as tax savings, property ownership, rental income, etc. Additionally, it is not as erratic as the equities markets. These have increased interest in real estate investments. Which property investment is more advantageous if earning a side income from rents is an investor's primary goal? Commercial property investment or residential?
While both of these types of real estate investments offer significant advantages, there are a few things to remember when investing in real estate, such as the availability of tenants.
Despite various variables, the real estate industry, particularly the residential sector, has withstood the test of time and emerged as the perfect investment for those with a medium to low-risk tolerance. Most investors favor the residential segment due to the larger initial investment required for commercial real estate.
However, each category has its pros and cons. Most people are unaware of these distinctions and concentrate more on one kind of real estate investing. Let's clarify the situation.
Different Characteristics of Commercial and Residential Properties
Rent in the Commercial and Residential Real Estate
Gross rental yield in India for residential real estate typically varies from 3%-5% of the property's market value annually, while they rise to 6%-10% for commercial properties.
According to the real estate website Housing.com, the overall returns predicted over ten years are presently about 8%-9% per year in the residential real estate sector, compared to 13%-15% per year in the commercial real estate sector."
Let's use an example to help you understand: If someone spends, say, Rs 2 crore for a three-bedroom home in a posh area of Gurugram, they may expect to receive between Rs 36,000 & Rs 42,000 in rent each month. Thus, the annual rent is almost 4,00,000.
Additionally, the rent is influenced by various criteria, such as the proximity to surrounding amenities, in this case, the metro and significant malls, shopping centres, hospitals, workplaces, etc. The rent typically rises by 8%-10% annually, although it might sometimes stagnate or even fall somewhat if the market weakens.
In the case of commercial real estate, spending Rs 5–6 crore in a desirable area might bring in rent of about Rs15–20 lakh per year. However, unlike residential property, the lease is set for a more extended period; thus, there is no yearly increase. The upside potential is also constrained because the rent is already on the upper end.
The maintenance cost of a commercial investment can be unaffordable despite the increased rent, which lowers the actual return you receive.
Since both have advantages and disadvantages, choosing between them might be challenging. The investor's financial objective will ultimately determine the response.
Commercial real estate is safer and more reliable because of the huge rent. The lease is lengthier, so you won't have to deal with various tenants if your budget is not a concern and you want to generate higher rent over the long run.
However, residential property is the best option if you have a small budget and limited maintenance skills. You may quickly sell it or utilise it to collect rent.
Residential units can be much easier to handle if you operate on a small scale, even though commercial property gives more significant returns.
Before making a decision, the investors must consider all the relevant aspects, including the maintenance, budget, operational costs, connectivity, rent, the availability of tenants, and market conditions.
Summary: Rewards V/s Risks For Commercial Vs Residential Property
While investing in commercial or residential properties, there would be certain risks and rewards; let's sum it up in this last section.
Getting a loan against property is also easier if you need instant money for any work plans. Typically commercial businesses often take up loans against property to grow their business.
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