Residential v/s Commercial Properties

Investing in Residential or commercial properties. What’s better? 

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 do 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 only a market that is comparatively least affected in times of economic crisis. Real estate investments can be classified into two forms and they are: 

Residential Investments

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 prolong 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 a 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.

Traditional residential loans, or residential mortgages, are typically distributed by banks to borrowers. Unlike residential mortgages that are typically between banks and the individual buyers, a commercial mortgage is made to a company. For tax purposes, it is also usually in the best interest of the borrowers to sign as a representative of a business entity — since the property is zoned for businesses uses.

 In addition, commercial loans are riskier (in the eyes of lenders) than residential loans. This makes a commercial loan’s interest rates higher and terms shorter. Why? Because there is a whole secondary market for commercial lenders that is separate from traditional banking institutions.

 In order to qualify for a commercial loan, investors are required to have a business plan as well as a solid credit score — for the most part. Commercial lenders are more concerned with the property’s projected cash flow than residential lenders are. They will want to know who will pay utilities, what type of maintenance will be required, and more before approving the loan.

 Finally, the terms, conditions, restrictions and penalties vary greatly between commercial and residential loans. Homeowners usually finance their properties over lengthy periods of time. — most commonly with 30-year fixed rate mortgages. Although residential buyers have many other loan options available, this time frame is ideal due to a longer amortization period that creates smaller monthly payments. Residential loans are typically amortized over the life of the loan, so the loan is fully repaid at the end of the term. Unlike residential loans, terms for commercial loans typically range from five to 20 years, and the amortization period is often longer than the loan term. Commercial lenders are also able to customize the loan repayment schedule to each borrower’s specific requirements.

Choosing between a commercial vs residential investment property is no easy feat to tackle, especially because both come with their own set of benefits and drawbacks. Both will diversify your portfolio, both come with significant tax benefits, and both will bring you one step closer to achieving your goals of financial freedom…So how is an investor to choose?

 The answer to that question ultimately depends on what it is he or she wants to gain by investing in real estate. Investors should take some time to think about their short- and long-term goals. If they are looking to make a quick buck to start, rehabbing or wholesaling a residential property might be the way to go. If, on the other hand, they are in it for the long haul and looking to achieve passive income, commercial properties offer attractive benefits.

 If you want to earn the most returns, you might want to consider investing in commercial real estate. On the other hand, residential properties may be more appealing if you’re more comfortable working on a small scale. Thinking about how much time you’re willing to devote to your project as well as your risk tolerance can make it easier to decide where to invest your money.

As quoted by a few leading real estate experts... Real Estate market is expecting push post-Lok Sabha Elections 2019 as the sops — reduction in GST, reduction in RBI Repo Rate etc. — announced by the central government ahead of the general elections 2019 notification would start showing its effect on the sector. In fact, the private equity and venture capital funding agencies have got a clue about the government intentions in regard to the real estate sector hence the question has become ripe into the Indian real estate sector as to which segment is a better investment option: commercial real estate or residential real estate? The industry insiders say that Real Estate Investment Trusts (REITs) are enough to indicate that commercial real estate is poised to give a better return for both individual and retail investors while the residential real estate will remain a hot destination for the individual investors.

Author- Mohammed Nadeem