Should You Invest in Commercial or Residential Real Estate?

Investing in real estate is a very wise decision that will prove to be very profitable for you in the long run. But what kind of property should you choose to invest in – commercial or residential? A residential property is a place where someone will be living, and a commercial property is a place that will be used solely for business purposes.

In this article we look at all the factors involved in commercial and residential real estate investments. Each has it’s own merits and demerits, so it’s up to you to look at the facts and make a decision based on your requirements and resources.

1. Cost of Acquiring the Property

For commercial real estate, the entry point is quite high. The initial investment itself will be on the higher side. You will have to be prepared to shell out at least 20-30 lakhs to procure a commercial property.

A residential property, on the other hand can be purchased at a much lower cost. In fact, residences in a particular locality will be relatively lower priced than commercial buildings in the same area.

2. Nature of the Property

A residential property can fall into one of the following categories:

• Individual house with land
• Individual house in a developed layout (villa project)
• High rise apartment

A commercial property generally falls under one of these categories:

• Stand alone shop
• Shop in a building complex
• Entire building complex

3. Nature of Income

For a commercial property, the income comes mostly from the rent or lease paid by the tenant. You have to connect with other businesses, create contracts and follow all the necessary legalities. Economic fluctuation affects commercial rental properties more, so it will affect your returns as well. The commercial market is quite narrow – only those business that can operate in that location will want to rent your space.

When it comes to residential property, you cater to a larger market – you can target a wider segment of people. You will be dealing with individuals, so the deals can be a bit more flexible. The returns too are more stable, as residential properties are not much affected by economic fluctuation.

4. Type of Tenancy

Residential properties are usually let out only on rent. The rental agreement is renewed on an annual basis, with a 10 – 15% increase in the rent each year.

For commercial properties, both landlords and businesses prefer long term contracts or leases. You will be leasing out your commercial property for a fixed period of time and it has to be renewed after the period is over.

5. Income Generation Potential

Both commercial and residential have a good income generation potential but it is dependent on the location and the market. You can earn an income in one of the following ways.

• Monthly rental or lease income
• Capital appreciation – the profit you gain when you sell the property at a later date.

6. Ownership of the Property

For a residential apartment, or a villa in a layout, you own the area spanning your flat/house and also a portion of the common undivided area surrounding your property. In the case of an individual house, you will have complete ownership of both the house and the land surrounding it.

When it comes to commercial properties, if you own an individual shop or an entire building complex, you retain 100% rights over it. In the case of a shop in a building complex, you own the shop and a percentage of the common undivided area in the complex.

7. Life of the Property

If you have 100% ownership of the property (whether residential or commercial), you can decide when to renovate it. If you are in a shared ownership position, you will only have a say in the decision. It is the owners’ association that must collectively make decisions that pertain to the apartment/shopping complex.

8. Maintenance

In an independent house, you have the complete rights to maintain the place according to your budget and your needs. You will also be solely responsible for maintaining your property. In an apartment or villa layout, the association will be handling all the maintenance projects. You will have to pay a monthly maintenance fee, and also a percentage of any additional expenses that may arise.

When we look at commercial properties, the cost of maintenance will be a bit higher. Again responsibility of the maintenance depends on the nature of ownership. If you are the sole owner of the shop or complex, you are completely responsible for it. If you own a shop in a bigger complex, you will have to abide by the rules of the shop owners association.

9. Obtaining Finance for the Property

The finances for purchase of a residential property will be given based on the income of the buyer alone, and rarely based on the income potential of the property. For commercial properties on the other hand, the financial assistance given will be based on the income/business potential of the property, and the credit ranking of the buyer.

I hope this article has given you a better idea about the pros and cons of both residential and commercial properties. You will have to take a decision whether to invest in commercial or residential real estate, based on your budget, current requirements, and future plans. You can always take the assistance of one of our consultants to make better decisions regarding your real estate investments.