The commercial and residential property markets are full of real estate investment opportunities that promise greater results.
However, a common question we get asked is what is better from the investment perspective: Commercial property or Residential property.
This article gives you a quick rundown of both options so you can make a more informed decision on which property type you want to add to your investment portfolio.
What Is The Difference Between Commercial Property Investment And Residential Property Investment?
Commercial property investment and residential property investment are both good investments, however, the two are not the same.
Commercial property investment is one of the most popular investment opportunities for investors who want to get a regular recurring income from their investment, while residential property investment is more likely to be a longer investment with a good appreciation of the underlying asset.
Here are the pros and cons of investment in both.
Pros of Investing in Commercial Properties
- Lease Length: The lease length for commercial properties is typically much longer than for residential ones, which means that you do not have to look for a new tenant for your property often. For an investor, this is advantageous as they don’t have to actively manage the property. For example, Assotech Hi-Streetis a pre-leased commercial shopping complex, which means investors don’t have to even look for a tenant for their property; it has already been taken care of
- Rental Yields:The rental yieldsfrom commercial properties is typically 5%-12%, while for residential properties it is 2%-4% (source). That is why commercial property investments are likely to be more profitable than residential counterparts.
- Entering and Exiting an Investment: Both residential and commercial properties are illiquid assets. But, with REIT (Real Estate Investment Trust) regulations, creating a portfolio of commercial properties is much easier than residential properties.
- Risk and Volatility: Due to frequent changes in tenants, upkeep costs, higher maintenance, and lower returns, the risk and volatility are perceived to be more in residential properties. On the other hand, commercial properties offer stable and long-term rentals with remarkable income streams.
- High Demand: The demand for Grade A pre-leased assets is much higher than its supply. This makes commercial properties more liquid than residential properties.
Cons of Investing in Commercial Properties
Here are a few pros of investing in commercial real estate.
- Exposure to Economic Shocks:The demand for commercial goods and services is always ebbs and flows. This means that the market for commercial property is more elasticated than the market for residential property.
- Bigger Initial Investment:If you are buying a commercial property, the initial investment is usually higher than for a residential one. In addition, the cost of purchasing a commercial property is usually higher than that of a residential property of similar size.
- Requires Exhaustive Research: Commercial investment generates higher returns. Yet, if all the facets are not considered properly, the investment can become an expensive affair. Apart from the cost of acquisition and location of the property, emphasis has to be given on the real estate laws, taxes involved, building quality, profit opportunities, demand and supply, lease and deposit agreements, etc.
- Stable Capital Values: In commercial properties, the capital values tend to remain stable for longer periods.
- Interest Rate on Loans:The bank loans for commercial real estate normally carry a higher interest rate than the loans on residential properties.
Pros of Investing in Residential Properties
Here are a few positive aspects of investing in residential properties.
- Annual Rent Increases:Most of the commercial leases hold fixed annual rent increases. But, this is not the case with residential leases. In India, for residential properties, the appropriate rate of rental increase is around10% for every two years.
- Maintenance and Repairs:For commercial properties, the investors are liable for paying land tax, council rates, insurance, maintenance, and repairs. However, in residential properties, these outlays are billed to the tenant.
- Terms of Finance:Commercial property investments have a higher risk than residential investments. Henceforth, banks usually demand a minimum deposit of 30% for commercial investmentsbut often give loans to residential properties with smaller deposits. In addition to that, residential loans sometimes also come with tax breaks.
- Capital Growth:This point is fairly divisive as the majority argues that residential properties experience faster rates of capital growth than commercial properties. But this can vary depending on the location and placement of commercial property.
- Lower Holding Period:The residential properties have a comparatively lower holding period for returns, as compared to commercial properties.
Cons of Investing in Residential Properties
Here are some of the cons of investing in residential properties.
- House Prices: The prices of residential properties could fail to rise at full tilt, or could even fall. The property could even be untenanted for a very long period of time.
- Additional Expenses: Residential property requires upkeep. The owners must be prepared to pay for major repairs, which could have a major impact on the value of the property.
- Rental Agreement:In residential properties, usually, the rental agreement cannot exceed 36 months. So, the investor needs to look for new tenants after every 36 months.
There are a lot of factors that come into action when choosing between commercial and residential property such as the responsibilities of maintenance, the risk profile, etc. However, the bottom line of the whole discussion is that a carefully managed and well-governed property can be successful, no matter which market it is in. Start by picking a reputed builder like Assotech to ensure that the fundamentals of the investing are taken care of. Then depending on your investment scenario, pick a property that works for you.
Here’s wishing you an ever-increasing ROI.