The decision to invest in commercial or residential real estate cannot be made overnight. They are tangible assets but they differ widely in terms of risk, capital, income, and returns. Each strategy has its own benefits and a variety of challenges. The path chosen by the investor depends on his goals, risk tolerance, his capital, and time.
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What is a residential property?
Any property which is designed for single-family homes, townhouses, and apartments are called residential properties. The owner can live in or let out for rent. Families and individuals typically lease residential properties. As a result, there is an emotional element involved in residential real estate as it involves renting individuals or families their primary place of residence.
What is a commercial property?
Commercial property includes properties that are used for non-residential activities such as hotels, office space, retail shops, industrial buildings, parks, public facilities, etc. The owners prefer to rent rather than own the property they operate their business from since the real estate is not their core business they can free up capital to invest in their core business. This makes commercial property a significant investment market.
Comparison between investing in commercial vs residential:
Barriers to Entry:
It is relatively easy to get started by investing in residential property. Most of us are acquainted with tenant and landlord relationships. Commercial properties, on the other hand, require a lot of research such as the geographic location of the project, viability of the project, seismic strength, consents required, managing all the tenants. It requires proper management to help in the collection of rents, look into the repairs and maintenance, and facilitate a comfortable experience for the tenant. But the prime factor for the barrier would be the requirement of the heavy outlay which takes the form of investment in an immovable asset which is illiquid.
Return on Investment:
The commercial property yields a better Return on Investment when compared to the investment in residential property. The return of a commercial investment ranges between 10% to 15% whereas a residential property cannot fetch more than 5%.
Tax Benefits:
The properties that are let out, attract tax on income from house property. If house property is taken on a home loan, qualifies for deduction under Section 80C of the Income Tax Act with the other available deductions under the same section to the extent of Rs.150000 and the interest payment is allowed under Section 24 of the Act wherein the total loss claimed under the head of the income can be up to Rs.200000.
Cost:
Residential property is cheaper compared to Commercial Property. The maximum loan that can be availed in regard to a commercial property is up to 60% whereas a loan up to 80% of the cost can be availed in respect of a residential property.
Risk Factor:
The biggest risk associated with commercial property is stereotyping. We see that if an area is stereotyped as a market for garments, we see that all the other businesses in the vicinity would be of the same and other businesses do not flourish. Residential property, on the other hand, is immune to these risk factors.
Why is commercial real estate becoming more attractive?
Large real estate investors are turning towards commercial realty, because of the diversity in asset holding, reduced risk exposure, and even the property leasing as it would lead to regular income flow. Developers having secured land holdings in the city can use it to their advantage.REITs, open up commercial real estate to even smaller investors who earlier could not look at larger deals due to capital constraints. The newest option of investing through REITs makes it more viable in the range of options to participate in the ecosystem. It appears to be the best channel for retail investors and involves fewer challenges in terms of transparency and due diligence.
Commercial space has grown up to 40 million square feet off late. This is due to the inclination of several residential developers towards commercial buildings such as office spaces, new-age co-working joints, and even e-commerce-specific buildings.
The solution between residential vs commercial depends on what he or she wants to gain by investing in real estate. They need to focus on whether it is for short term or long term investment. If they want to make quick bucks, wholesaling a residential property might be the way to go. But, if it is a long haul, then commercial properties offer much more attractive benefits to invest in.
If you want to earn the most returns, then, consider investing in commercial real estate. But, residential properties are more appealing if you are comfortable working on a small scale. Thinking about how much time you are willing to devote to your project as well as your risk tolerance can make it easier to decide where to invest your money.
FAQs
- Do you need a degree in commercial real estate?
Real estate is a very competitive field, and long work hours are often required to get success in it. While a college degree is not required to become a commercial real estate broker, professional licensure is required.
- What is the 50% rule in real estate?
To do a very quick pass analysis of a single-family investment property, the 50% rule is applied. The rule states that on average the total expenses associated with operating an SFH investment will be about 50% of the gross rents.
- Which is better: flipping houses or renting houses?
The biggest difference between flipping housings and buying rentals is that flipping requires active management, while rentals earn you passive income from the monthly rent.
- What is a good return on commercial property?
Commercial properties tend to yield higher returns between 5% to 10% net, whereas the residential properties yield up to 3% to 4% gross.
- Which is better for investment-residential or commercial property?
Investing in a residential property is usually easier than in a commercial property due to the size of the investment which is generally significantly smaller. The strategy of residential properties is to generate an investment income by involving rental properties.
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