Commercial vs Residential Property. Where to invest?

The average first-time property investor in India generally chooses to buy a residential property not only because a self-owned home is a highly valued form of security, but also because commercial property is a much more expensive and riskier proposition. Investors who already own a home however and are looking for investment opportunities are more likely to consider commercial options. Residential and commercial properties each have their own pros and cons. When making a choice, investors should consider the triumvirate of Cost, Risk and Return on Investment.

Key Factors In Decision-Making Between Residential and Commercial Property

Cost

  • Initial investment in residential property is generally much lower as compared to commercial property unless buying individual shops.
  • Bank loans can finance 80% of residential investment, whereas they grant loans only upto 60% on commercial property.
  • Rates of Interest are 2% to 4% higher on commercial property as compared to residential property.
  • Home loans have tax benefits, unlike those taken for commercial property, which have none.

Return on Investment

  • Experts believe commercial property can fetch anywhere between 10% – 15% return on investment, depending on the quality and location of the asset. a property worth 4-5 crores in a prime location can fetch upto 40 lakhs in annual income! However, capital appreciation is limited.
  • Residential property investments are unlikely to yield more then 4% rental yield especially when managed by individuals.

Risk

  • Commercial property demands a high capital investment as compared to residential property.In addition it is vulnerable to economic slowdown, low demand, location and competition from other locations/builders.
  • Residential property is relatively immune from these risk factors since it is end user driven & there is a huge shortage.

Overall, both residential and commercial properties have their own drawbacks and benefits and where investors put their money is largely dependent on a combination of how much of risk they are willing to take and their financial status. Generally, most real estate investors start by investing in residential property before stepping up to investing in commercial spaces. This table lists the salient features of both kinds of property that will help in easier decision-making.

 Residential  Commercial
Return on InvestmentLower capital investment with steady, moderate returns that will increase with property value.Higher initial investment but with higher return on investment that will also increase with property value.
Risk Relatively low risk venture. The huge shortage in the housing sector means property will always be in demand and values will continue to appreciate.Relatively high-risk venture that is vulnerable to economic slowdown, location, and competition from other businesses amongst other factors.
MaintenanceMaintenance of the property is usually the owner’s responsibility.Maintenance and interiors are usually done by the tenants according to the needs of their business.
FinancingBetter financing options from Banks.Banks will offer financing to a lesser degree with 2%-4% higher rates of interest on loans.
Tax BenefitsHome loans are eligible for tax benefits.No tax benefits on loans.
LegalRelatively simple and easy to follow legal formalities.Legalities can be complicated.
Lease Short-term leases (1 to 2 years) are the norm with option to renew.Long-term leases (5 years) are the norm with an option to renew.
Renting If tenants are hard to find, which is uncommon, self-occupation is an option.If tenants are hard to find, vacancy costs can be crippling.

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