Investing in Residential or commercial properties. What is better?

Investing in Residential or commercial properties. What is better?
Updated At: 2024-02-11 09:27

What’s better? Investing in commercial properties or investing in residential properties. This is a very important topic for any potential investor who is looking out for making an investment in real estate. We here at OSS have discussed everything that you need to calculate before you make the investment in this market.  

Investing in real estate in itself is very good for your portfolio as it’s another kind of diversity you can have in the form of investments, this helps in dividing your risks! By making investments in real estate, you can benefit from the fact that Real estate is the only market that is comparatively least affected in times of economic crisis. Real estate investments can be classified into two forms and they are: 

1. Residential Investments

2. Commercial investments

Residential properties... when talking about the rental yield it gives you about 2.5-3%. Which really isn’t that bad. But, keeping in mind this is the rental yield we are discussing here! There are many benefits of investing in Residential properties for example... It is very easy to get a loan from banks for the purchase of these kinds of properties. Also, the leasing process is much easier. In comparison with commercial properties there is a low holding period as compared to commercial property. Now, talking about the draw-backs of investing in residential properties are that you have to make an initial investment of getting the interiors done for even giving it out for rental purposes and even after that the rental yield is not that high. Also, mainly a rental agreement in residential properties cannot exceed a period of 36 months. Also, buying a residential property is comparatively cheaper.

 So, speaking about commercial properties... It has a brilliant rental yield of 6.5-8.5% which is an excellent yield in terms of commercial projects in real estate. Also, it is possible to lease a commercial property out for long-periods that is up to 9 years. The commercial value is not very volatile! That means there are no major fluctuations with these kinds of properties. But again, that can be contemplated in a good and a bad way! The property values tend to be stable for prolonged periods of time and also for it to be a commercial property it must be of a specific minimum size and also it is very difficult to sell as there are very few buyers for commercial properties in the market! 

 We must also keep in mind that anytime we take loan for buying any of these properties be it... Residential or Commercial there is a provision given to the individual while paying-off his Income tax these provisions come under Section 24 and 80C of the Income Tax Act.

 So, after looking at the pros and cons of both kinds of properties... We can say that both have their own advantages and disadvantages. One has a higher yield but is harder to sell and the other has a lower yield but is easier to sell. So, it all depends on the perspective of the investor that what kind of risk is he willing to take. 

Commercial properties are great for those who have some business knowledge. If you understand a potential tenant’s financial history and goals, it will give you a better idea of what your potential earnings could be. Commercial properties can also offer great returns. These properties tend to have a larger annual profit than residential investments. Also, leases are usually for longer terms and there are options for renewal. Compared to residential properties, commercial tenants tend to stay longer, which can give a greater sense of stability for you as the owner.

One reason that is vastly taken into consideration is: The rental yields a property can give to a commercial property owner, while people have a lot of opinions about this feature of the commercial properties, here are a few condensed pointers for any future reference. Rental Yields may be better for commercial properties for commercial property like shop space, the rental yield that you can command depends directly on the human traffic in the area. Thus, if you invested money in such a property investment, the monthly cash flow would be more than an equivalent costing residential property investment in the same area.

Improvements on the property Business tenants generally treat properties different from residential tenants. A business owner who is renting property would generally fix small defects in the property so that he can carry on business and would not bother the landlord about such small problems. But additionally, most small business owners would generally carry out small improvements in the property that could boost the property value of your commercial property.

An example of this could be the installation of a PBX System and wiring up the whole office for a local area network. This could save your new tenant a lot of time and could be used to give additional value to the terms of the rental that you are providing.

Now, let’s give a thought to the Residential Real-Estate side of the coin where we can see that it is a safer gambit as it used for personal purposes the maintenance costs need not go as high as it usually does in commercial properties. We will be discussing a few pointers which again can be used for any future reference while in any dilemma for making the right choice in the field of real estate. It is far easier to get a loan for residential real estate than commercial real estate because the residential real estate market is considered much more stable. Individuals and families always need a place to live. Businesses can more easily move, and you can lose far more money by picking a bad commercial tenant than a family that misses the rent one month. This means the residential vs commercial real estate investing favours residential real estate if you don’t have experience vetting tenants.

People will forgo credit card bills and cut their budgets to avoid being evicted. Commercial tenants may miss the rent for months, and it is difficult to evict them. Furthermore, you could lose commercial tenants whose bankruptcy costs you months of back rent. This means you’re more likely to continue seeing rental income from financially stressed apartment dwellers than commercial tenants.

We hope this gives you an insight about how the residential and the commercial real estate markets work. This could be your gateway into getting into this flourishing market.  

roperty prices fluctuate due to a complex interplay of economic, demographic, governmental, and social factors. Understanding these dynamics can help stakeholders make more informed decisions.