Commercial Vs Residential Real Estate Investment

Commercial Vs Residential Real Estate Investment Buying Guide

Real Estate investment is for everyone. To invest in real estate, one need not have special skills, experience, or prior education in the said field. It is not only safer but also yields significant profits in the long run.

Investment should always be a well-informed decision. First of all, What is Real Estate? What is commercial real estate? And What is Residential Real Estate? Which is a more viable option for investment? 

Read on to know.

According to Google, Real Estate implies property in the form of land and buildings. Real estate investment can be done in commercial as well as residential real estate.  

Commercial real estate encompasses offices, trade buildings, industrial buildings, hostels, restaurants, hotels, warehouses, schools, colleges, and wholesale and retail stores.

Residential real estate implies buildings that serve the purpose of habitation - Flats, apartments, bungalows.

Commercial Real Estate:

Commercial real estate is closely linked with the overall development of any region. In metropolitan areas such as Mumbai, economic development is continuously evolving. New businesses are opening up and with progress, existing businesses require larger workspaces. 

The earning potential is the best reason to invest in commercial real estate over residential real estate. Commercial properties generally have an annual return on investment of between 6% and 12%, depending on the location, present economy, and external variables (such as a pandemic).

Commercial property prices may seem obscure to examine at first, but you may obtain the existing owner's income statement and establish what the price should be based on it. If the seller is working with an experienced broker, the asking price should be set at a level where an investor can earn the area's typical cap rate for the commercial property type they are interested in (retail, office, industrial, and so forth). Commercial properties fetch higher rental than a similar sized residential unit, but at the same time commercial properties are costlier and require more maintenance, because of the usage.

Residential real estate

Residential properties - our homes - are undoubtedly the more popular choice among people when it comes to investing in real estate. And the why is quite simple - Residential properties are mostly bought either to live in it or to lease/rent it out. 

The per unit area cost for residential spaces is generally lower than the ones for commercial spaces. Also, the maintenance is lower which makes it easy to buy and bear the expenses. So it may seem like you’re on the upside when it comes to getting your money’s worth. But if we examine a bit closely on the returns linked with your investment, a smaller commercial space might fare better than a larger residential one - although location is a key factor in this case. Not only that, but any decrease in economic activity in any sector will first affect residential renters, as they will always wish to reduce their losses in the absence of a definite, long-term lease arrangement.

So what should you as an investor do?

As somebody who’s looking to invest in real estate with the outlook of getting the most out of your investment, it’s absolutely necessary to make an informed decision. Don’t worry, we’re going to make it quite easy for you.  

Residential property is usually leased out to tenants who can be individuals or families. So the inflow of rental yield depends on the demographics of a tenant. Since a family generally moves/changes living arrangements as a unit, the income from a property can suffer due to the unavailability of preferred tenants. On the contrary, Commercial properties are rented out by brick and mortar businesses and offices. They usually enter long term lease agreements - as a commercial space generally needs quite a bit of construction work to fit to a business’ needs which is an unviable expense in the short term and also there is mostly a lock-in period too.

Residential properties, as we’ve stated above, have a lower cost per square fee for the same area, in the same location as compared to Commercial ones. So it is really necessary to be clear about the output you require from the investment. If you decide that the primary requirement is a high return on investment, you can now evaluate which of the two options gives you better based on the economic activity in a region. For example- Businesses will pay higher even for a small property if it’s in a good location.

Another important criteria is how much time can you devote to the property you own. Residential spaces usually require light maintenance, most of which can be carried out by the tenants themselves. However, Commercial real estate needs comparatively more maintenance and time for all the legalities to be in order.

Feels a bit easier now? We hope it does!

But what if after evaluation you want both? Or maybe you already own a residential property but would like to own a commercial too - seeing the returns? 

Guess what - There is a now a way to own a commercial property for lower than 1000 rupees! Its known as REIT - Real Estate Investment Trusts and we’ve done an entire series on this. Click on the link - REIT : Real Estate Investment Trusts - to read all about it and become a property owner today !


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