Business

Commercial vs Residential: Which is better investment for rental income?

There are key benefits to investing in real estate like real estate ownership, tax savings, rental income, etc. It’s also not as volatile as the stock market. These things have made real estate investing quite popular.

If an investor’s primary goal is to get a second income from rent, the question arises – which type of real estate investment is more profitable? Residential or commercial.

While both of these types of real estate investments have their key benefits, there are certain factors that one must consider before making any real estate investment such as availability. tenant availability, location, operating costs, maintainability, lease, etc.

Despite many factors, the real estate market, especially the residential segment, has withstood the pressure of time and proved to be an ideal investment for the average and low-risk investor. However, due to the higher initial investment in commercial real estate, most investors prefer the residential segment.

But there are advantages and disadvantages in both segments. Most people don’t understand these differences and end up focusing more on one type of real estate investment. Let’s find out clearly.

MORE: REITs vs Real Estate: What Should You Invest and Why?

Difference between residential real estate and commercial real estate

The basic difference between residential and commercial real estate is that first of all, people invest in real estate such as houses, apartments, villas, focusing on real estate that can be lived in or for people. hire hire. Then investors focus on real estate such as shops, office spaces, warehouses, hotels, restaurants, etc.

The relationship between landlord/owner and tenant in a residential space is more private and intimate than in the case of commercial real estate because people do not actually live in the space.

Since real estate rental is a concept that was developed due to the demand for affordable housing, tenants of residential housing only need minimal and basic infrastructure and utilities, that is why Operating costs of residential real estate are lower than commercial real estate.

However, rents are more expensive for commercial real estate and rental periods are also longer, so while investing in commercial real estate is higher, returns are also higher. While the return is higher in the case of commercial real estate, so is the risk. Unlike residential real estate, the rental value of commercial real estate can plummet when the market slows down.

And while rents are higher for commercial real estate, factors like space and location can have a profound effect on its rental value.

In addition, it is easier to find tenants for residential real estate than commercial real estate due to lower rents. Residential real estate resale is no more complicated than commercial real estate.

Furthermore, the responsibility for the maintenance of the residential property rests with the owner while for the commercial property the tenant is responsible.

However, owning commercial real estate is more complicated than residential real estate in terms of legal issues, registration, etc. In addition, delayed ownership can be a major disadvantage in the case. residential real estate.

Now that we know the basic difference between the two types of real estate investment, let’s take a look at what rents will look like.

Rental of residential and commercial real estate

In residential real estate, the total rental yield is typically in the 3-5% per year range of the property’s market value while this rises to around 6-10% for commercial real estate. .

“Estimated 10-year total return, currently around 8-9% per year in residential real estate, compared to 13-15% per year in commercial real estate,” the real estate website Housing.com property announced.

Let’s understand with an example, if a person buys 3BHK property in an upscale neighborhood of Gurugram, such as 2 crore, he/she can get around 35,000- 40,000 per month. So each year, the rent received is about 4,00.000.

In addition, the rental price depends on many factors such as nearby amenities, in particular cases near the subway and major commercial centers, shopping malls, hospitals, offices, etc. increase 8-10% per year, but can also stagnate or decrease a bit in case the market slows down.

READ MORE: Wondering 5 common myths surrounding real estate investing

In the case of commercial and investment real estate 5-6 crore in a prime location can earn an annual rent of about 15-20 thousand. However, because the lease is fixed for a longer term, there is no annual increase as is the case with residential real estate. In addition, the potential for rent increases is limited as rents are already at a higher level.

It must also be noted that, despite the higher rent, the maintenance costs of a commercial property can also go down, reducing the actual profit you receive.

Choosing between both can be a difficult decision as both have advantages and disadvantages. The final answer will depend on the investor’s financial goals.

If budget is not a constraint and generating higher rents in the long run is the goal, then commercial real estate is a better and more stable investment because of higher rents, longer rental period so you won’t have to deal with multiple tenants.

However, if your budget and maintenance are low, then residential real estate is the way to go. You can use it to collect rent or easily sell it.

Commercial real estate is more profitable but if you are working on a small scale, residential real estate can prove to be much easier to manage.

Investors must consider all factors such as budget, connectivity, rent, maintenance, operating costs, tenant availability and market conditions before making a decision.

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