Residential v/s Commercial Properties

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    Residential v/s Commercial Properties

    The Information mentioned here was last updated on:

    6/7/2024

    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.

    Real estate investment has long been heralded as a reliable avenue for building wealth. Unlike the erratic nature of the stock market, real estate offers a tangible asset that appreciates over time and generates steady income. But what exactly makes real estate such a lucrative investment? Let’s dive into the various facets of return on real estate investment (ROI), its benefits, potential pitfalls, and strategies for maximizing your returns. What is ROI in Real Estate? Return on investment (ROI) in real estate is a metric used to evaluate the profitability of an investment. It’s calculated by dividing the net profit by the total cost of the investment, then expressing it as a percentage. In real estate, ROI typically manifests in two main forms: capital appreciation and rental income. Capital Appreciation Capital appreciation refers to the increase in a property’s value over time. Several factors can influence this appreciation, including: Location: Properties in desirable locations tend to appreciate faster. Market Demand: High demand for real estate can drive up property values. Economic Conditions: A strong economy generally boosts real estate values. Property Improvements: Enhancements and renovations can significantly increase a property’s market value. Rental Income Rental income is the revenue generated from leasing a property to tenants. This income stream is particularly attractive for several reasons: Steady Cash Flow: Regular rental payments provide a consistent income. Mortgage Coverage: Rental income can help cover mortgage payments, easing the financial burden. Passive Income: Over time, rental properties can become a source of passive income, especially if managed by a property management company. The Benefits of Investing in Real Estate 1. Tangible Asset: Unlike stocks and bonds, real estate is a physical asset that you can see and touch. This tangibility offers a sense of security and stability. 2. Leverage: Real estate allows investors to use borrowed capital (mortgages) to purchase properties. This means you can control a large asset with a relatively small initial investment. 3. Tax Benefits: There are numerous tax advantages for real estate investors, including deductions for mortgage interest, property taxes, operating expenses, and depreciation. 4. Inflation Hedge: Real estate values and rental income often increase with inflation, providing a safeguard against the eroding value of money. Potential Risks of Real Estate Investment While real estate can be lucrative, it’s not without risks. Here are some potential pitfalls to be aware of: 1. Market Volatility: Although generally less volatile than stocks, real estate markets can still fluctuate based on economic conditions and market trends. 2. Property Management: Managing rental properties can be timeconsuming and challenging, especially if you have difficult tenants or maintenance issues. 3. Liquidity: Real estate is not a liquid asset. It can take time to sell a property and convert it into cash, especially in a slow market. 4. Upfront Costs: The initial costs of buying real estate, including down payments, closing costs, and renovations, can be substantial. Strategies to Maximize Your ROI To maximize your ROI in real estate, consider the following strategies: 1. Location, Location, Location: Invest in properties in desirable locations with strong growth potential. Research local market trends and economic forecasts. 2. Buy Low, Sell High: Look for undervalued properties or those in need of renovation. Improving a property can significantly boost its value and rental income. 3. Diversify Your Portfolio: Don’t put all your eggs in one basket. Diversify your real estate investments across different property types and locations. 4. Leverage Wisely: Use financing to your advantage, but avoid overleveraging. Ensure you can comfortably cover mortgage payments and other expenses. 5. Professional Management: Consider hiring a property management company to handle daytoday operations, tenant relations, and maintenance issues. This can save you time and stress while ensuring your property is wellmaintained. 6. Stay Informed: Keep up with market trends, economic indicators, and changes in real estate laws and regulations. Being informed allows you to make strategic decisions and adapt to market changes. Personal Insights and Conclusion Investing in real estate has been a cornerstone of my wealthbuilding strategy for years. The combination of capital appreciation and rental income has provided me with a stable and growing source of revenue. While it’s not without challenges, the benefits far outweigh the risks when approached with careful planning and due diligence. Real estate investment requires a commitment of time, money, and effort, but the potential rewards make it worthwhile. Whether you’re looking to diversify your investment portfolio, generate passive income, or build longterm wealth, real estate offers numerous opportunities. Remember, the views expressed in this blog are solely my own. As with any investment, it’s crucial to do your own research and consult with financial advisors to tailor your strategy to your unique circumstances. By understanding the nuances of ROI in real estate and implementing smart investment strategies, you can navigate the market effectively and achieve your financial goals. Happy investing!