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Real-Estate-Investing

Commercial Vs Residential: Which Investment Is Better?

Over the years, investing in real estate has been a common method of diversification. Enjoying large returns in the form of a secondary income is one of the key benefits of real estate investing.

However, a lot of investors are still uncertain about whether to invest in commercial or residential real estate: Which would be a wiser investment?

Choosing between commercial and residential real estate may be difficult for most investors. There may be a big difference in the return rate and the amount of money needed up front. 

Making an informed choice is made easier with the aid of RealestatesBD, which delves into the specifics of residential and commercial investing.

Is Commercial or Residential Real Estate a Better Investment?

Ultimately, neither option is inherently better than the other. Commercial real estate can offer better long-term returns than residential real estate, depending on the sector, but that’s not always true.

Average Real Estate Returns by Time Frame

Let’s take a look at the average returns for a handful of different types of property investment between 2012 and 2021 based on data from the National Association of Real Estate Investment Trusts:

Property TypeOne-YearFive-Year10-Year
Residential58.29%17.64%15.14%
Office22%5.15%8.48%
Industrial63.06%28.5%26.5%
Retail49.6%8.96%11.32%
Self Storage81.96%28.46%25.69%

That said, the costs and complexities associated with commercial real estate may not be worth it for some investors. As you grow your real estate business, however, it may be worth it to own each type to better diversify your portfolio.

How Much Does It Cost to Invest in Real Estate?

Most mortgage lenders require you to put down at least 20% on an investment property, and interest rates tend to be higher than they are on primary residences. 

With a commercial lender, however, you’ll usually need to put down at least 25%, and because commercial properties tend to be more expensive in general, that means you’ll need more cash on hand.

If you want to invest in either commercial or residential real estate without the massive upfront cash requirements, you can opt for real estate investment trusts (REITs) instead. 

These companies trade on public exchanges and invest in several properties to provide you with income and growth through diversification.

Residential vs commercial property: Risk versus rewards:

  1. Tax benefits: Commercial and residential properties that are let out, attract tax on income from house property. However, a house property that is taken on a home loan, qualifies for tax breaks under Section 24 and Section 80C of Income-Tax Act.
  2. Risk and volatility: This is perceived to be higher in a residential property, due to frequent change in tenants, higher maintenance and upkeep costs and lower returns. Commercial properties offer stable, long-term rentals, with predictable income streams.
  3. Entering and exiting an investment: Both are illiquid assets. However, with Real Estate Investment Trust (REIT) regulations, it would be easier to create a portfolio of commercial properties than residential properties. Also, since the supply of Grade A pre-leased assets is low, the demand is much higher, making it more liquid than residential properties. Above all these considerations, it is also important to examine the location, investment size and tenure, before making the final decision to invest in a residential or commercial property.

Benefits and Drawbacks of Investing in Residential Property

BenefitsDrawbacks
Lower entry ticketLow rental yields / rental incomes
No minimum / lowest size applicableInvestment in interiors, etc., to make it rent-friendly
Loan facilities easily availableRental agreement usually cannot exceed 36 months

Commercial Property with Rental Basic Income 

Suppose, the base rent is Rs 60 per sq ft and the fitout rent is Rs 40 per sq ft. The tenant will pay Rs 100 per sq ft, which is Rs 1,200 per sq ft per year. Now, if the actual selling price is Rs 6,000 per sq ft where a tenant does his own fitout, a developer may charge higher, say, Rs 9,000 per sq ft, promising a higher return. This may look attractive but once the stipulated time period is over, the returns will drop.

FAQs

Are commercial leases different from residential lease structure?

Yes, when it comes to residential vs commercial property, the lease structures are very different. Commercial leases are usually one-sided, where the landlord cannot evict the tenant but the tenant can vacate the property at any given time. Commercial leases are structured as a 3+3+3 or 5+5+5 structure, meaning either a 9-year or a 15-year structure with any escalation every 3 or 5 years.

Do commercial spaces in India give out bare shell property?

When it comes to residential vs commercial property, it is the tenant who has to do the flooring, ceiling, air-conditioning, wiring and the interior cabins, conference rooms and other fitouts in a commercial property. A tenant may also ask the developer to provide the fitouts but then the rent will be higher.

How can I choose the best location for a commercial property?

Before finalizing on a property, you would have already had a selection criteria. A thumb rule is to go with locations where vacancy is less than 5%.

What are the different kinds of commercial rental properties in India?

Shopping malls, retail spaces, free-standing buildings converted into office spaces and professional offices, are some of the properties you can let out for commercial purposes.

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