Nowadays, owning physical Real Estate has become a necessity. As Real Estate is a popular form of diversification and has the potential to beat inflation, investing in it secures your finances and future. The commercial and residential real estate sectors offer a wide variety of investment options. So if you are unfamiliar with the Real Estate investment world, investing can get confusing.
To help you better understand the scope of investing in commercial and residential Real Estate and help you decide which one is best for you. In this article, we have covered both these segments in great depth. Let’s dive in!
The fundamental difference between Residential and Commercial properties:
Residential properties are something that is bought for living purposes. For example, apartments, bungalows, and duplexes.
In contrast, Commercial properties are used for business purposes. These can be used by you or can be rented out to others like startups, MNCs, IT companies, etc. to earn rental income.
The scope of investing in Residential and Commercial Real Estate
Residential and Commercial Real Estate are great investments if you are someone who’s looking out for a new property, either for self-use or to rent it out and earn rental income. Especially, now that the Real Estate scenario is changing.
The upcoming infrastructural developments in the megacities of India have backed the growth of Real Estate in both Residential and Commercial segments.
For instance, to solve the traffic congestion in Delhi, the state’s government is building elevated roads, a flyover, and an underpass. Additionally, NCR international airport is to be built near the Yamuna expressway, which has given a boost to the residential and commercial sectors in the surrounding areas.
Mumbai is undergoing many infrastructural changes as well. Navi Mumbai International Airport has surged the Real Estate market in the region. Moreover, the Mumbai-Ahmedabad bullet train line will increase demand for residential, retail, and commercial Real Estate in many ways. The Kalyan-Shil road, Thane, and Dombivli areas around the bullet train station will grow quickly, fueling the rise in Real Estate values.
Next, coming to the government norms
The new government rules, both in plans and implied are in the buyer’s favour. For example, RERA is tackling 4,000 stalled projects in Maharashtra to help buyers get their flats back. Besides, IBBI (Insolvency and Bankruptcy Board of India) has planned to bring a new rule to ensure that the buyer does not get affected by insolvency issues of the developer and gets their completed flats on time.
Also, due to the reviving Real Estate market of India and increasing demand for offices, NRI investments, establishment of IT companies, data centers, and rent escalations in major cities, this is the best time to invest in Real Estate to avail future returns no matter commercial or residential.
But what’s better in terms of returns - Commercial or Residential Real Estate?
Well, any investment depends on your budget, the purpose of the investment, and financial goals. Both Commercial and Residential Real Estate have differences when it comes to investing.
Listed below are a few basic differences-
1) Investment amount: If you are looking for a home to live in and have a low budget, then residential property is the best investment to go for. Residential properties can be rented out to tenants and you can earn regular passive income through monthly rentals. If you are solely looking for returns or want to start your own business and are looking for high returns, then Commercial property is a good option. In fact, you can rent your property to other businesses and earn a much higher rental income than residential property.
2) Operating costs: Since renting property as a concept evolved due to the need for affordable housing, a tenant needs only minimal and basic infrastructure and utilities which is why the operating expenses of a Residential property are lower than that of a Commercial property. This is because commercial properties are relatively extensive in size, are located in high footfall locations, have much technological equipment, and provide many facilities to the tenants.
3) Maintenance: When it comes to maintenance, commercial properties are relatively easier to manage as the tenant is responsible for the overall maintenance of the property. Whereas, in residential properties, the owners have to manage it themselves.
Now that we know the primary differences between the two types of Real Estate investments, let’s see what’s better in terms of returns.
Rental income-
Commercial properties have higher rents, and the lease tenure is longer, hence, the returns you receive annually are higher. Factors like space and location can profoundly affect the rental value of a commercial property. Hence, one must consider these factors while investing in commercial properties and making the final investment decision.
On the other hand, residential properties have smaller lease terms and lower rentals as compared to commercial properties.
Rental yield-
Rental yield is the percentage of annual return value received from the rental income of the property.
The annual rental yield of residential real estate is about 2%-5%. This is because the rental income on residential properties is lesser and the lease tenures are of smaller duration.
Talking about commercial properties, the annual rental yield is about 6%-8%. This is because the rental income of these properties is always on the higher side.
However, the rental income and rental yield depend on factors like location, space, accessibility, and amenities as well.
ROI-
Return on Investment (ROI) is a popular profitability metric used to evaluate how well an investment has performed. In Real, Estate ROI depends on various factors like infrastructural developments, location, demand in a particular area, etc.
ROI generated by residential properties is about 6%-8% due to their low rental income. Also, residential properties are not necessarily located at investment hotspots. Hence, the ROI of residential properties rely a lot on the economic factors in a particular area.
In the case of commercial properties, the ROI ranges between 10%-15 as the rental income received on these properties is higher, majority of the commercial properties are located in high footfall locations and are occupied by HNIs, UNIs and businesses that increase the property’s overall value.
Real Estate has been a valuable investment class that pillars your financial stability and growth. With technological integrations, Real Estate investments have become accessible and budget-friendly to all! No matter whether residential or commercial real estate, one has the flexibility to invest regardless of their financial situation.
For instance, commercial Real Estate is no more a big-ticket size investment for regular investors. With the emergence of REITs and fractional ownership, it has become possible to invest in sizeable amounts and yet earn high returns.
In essence, your investment strategy decides which kind of Real Estate investment you can consider. But to be precise, solely from a returns point of view, the advantage of investing in commercial properties is that the rents tend to be steadier and lease terms are typically more concrete and long-standing, which means tenants are almost always available. Commercial properties tend to return more gross revenue with less work. Residential properties offer better returns in most areas of the country and they don’t require a significant outlay of capital since there is no mortgage and tenants don’t incur any interest costs.
