Which rental income is more appealing: commercial property or residential property?

Which rental income is more appealing: commercial property or residential property?

Which rental income is more appealing when it comes to real estate investment: residential or commercial property? We examine each advantages and disadvantages.

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Rental income for commercial vs. residential property For those looking to invest in the real estate market, rental income is a crucial factor.

Property buyers are frequently perplexed over whether investing in a residential or commercial property would yield a higher return on their money. The general assetselection principles, such as the location of the property, quality of construction, age of the building, and usage, are the same whether the property is residential or commercial. “Keep a few things in mind when you consider investing in terms of the expected rental income for residential versus commercial property. Commercial assets are leased for longer periods of time than residential ones, which often require annual leases. Due to the frequent tenant change, vacancy risks are higher in residential properties. Therefore, before deciding between purchasing commercial or residential property, property purchasers need to pay attention to the qualitative elements of these two categories, the expert says.

How should commercial property be rented in India?

Experts advise potential buyers to take into account factors like the current leasing environment, the existing ecosystem in the region, distance from complementary & auxiliary industries, legal due diligence, clearances that are specific to the property's usage, etc. when making an investment in commercial real estate with rental income, such as office, retail, warehouse, etc.

Residential properties must be evaluated for livability in relation to social infrastructure, the neighbourhood, and the demographics of other residents when compared to commercial properties.

How do you figure out the rent on a house in India?

It's crucial to keep in mind that the gross rental yields on residential properties normally vary from three to five percent annually on the fair market value of the property when comparing residential and commercial real estate. Let's examine the distinction between business and residential property taxes. The net yields typically fall between two and three percent annually after deducting insurance, property taxes, and maintenance. Rental price increases range from five to seven percent annually. On the other hand, gross yields in commercial real estate typically range from six to ten percent annually. The annual net yields typically range from 5% to 8% after deducting insurance, property taxes, and maintenance. Rent increases here range from three to five percent annually. The residential real estate industry's estimated 10-year total returns are currently between 8 and 9 percent annually, compared to 13 to 15 percent annually in the commercial real estate sector.”

Commercial vs. residential real estate: advantages vs. risks Tax advantages: Rental revenue from commercial and residential buildings is subject to taxation. However, under Sections 24 and 80C of the Income-Tax Act, real estate acquired with a home loan is eligible for tax advantages.

Risk and volatility: Because residential properties experience frequent tenant turnover, higher maintenance and upkeep expenses, and lower returns, risk and volatility are seen as

being higher in residential properties. Commercial real estate provides reliable, long-term renters with steady income streams.

Entering and exiting an investment: Both investing in and withdrawing from a position involve illiquid assets. However, with Real Estate Investment Trust (REIT) restrictions, building a portfolio of commercial buildings would be simpler than one of residential ones.

Additionally, because there is a far higher demand than supply for Grade A pre-leased assets, they are more liquid than residential properties.

Prior to making a final decision to invest in a residential or commercial property, it is crucial to evaluate the location, investment amount, and tenure in addition to all of the above factors.

Benefits and drawbacks of investing in residential property Benefits Lower entry ticket No minimum / lowest size applicable Loan facilities easily available

Drawbacks Low rental yields / rental incomes Investment in interiors, etc., to make it rentfriendly Rental agreement usually cannot exceed 36 months

Leasing process is usually easier Comparatively lower holding period for returns, as against commercial property

Investing in commercial property with rental income: Benefits and drawbacks Benefits Higher rental yield and returns Longer term lease possible, i.e., up to nine years Leasing can be in bare shell or warm shell

Drawbacks The capital values of commercial properties tend to remain stable for longer periods of time The property may need to be of a specific minimum size, to be commercially viable Difficult to offload, as there are fewer buyers in the market

Commercial values are not very volatile If you are investing in commercial real estate with rental revenue, beware of this.

Developers may entice potential investors by displaying a higher rental in order to profit from the sale. This might be deceptive at times. Recognize that any fit out rent included may not be permanent and is therefore not bankable. They receive compensation for a set amount of time, such as five years.

So, how does that operate in terms of commercial real estate that generates rental income?

For example, let's say the base rent is Rs. 60 per square foot and the fit out rent is Rs. 40 per square foot. Tenant will pay Rs 100 per square foot or Rs 1,200 per square foot annually. Now, if a tenant performs his own fit out and the actual selling price is Rs 6,000 per square foot, a developer may charge more—say, Rs 9,000 per square foot—promising a larger return. This may appear appealing, but the rewards will decline after the designated time period.