Property Investment: Residential vs Commercial Property
When you are thinking of investing in property, which way do you go? Do you invest in commercial property? Or do you invest in residential ones instead?It is always advisable to fully consider all the options available, before making a decision. This applies more to the real estate sector than any other in our economy. This is because the real estate sector is the trickiest, most convoluted market in the Indian economy. It is so easy to lose money in this segment, specialised knowledge is an absolute necessary before taking the plunge into real estate investment. With this article, the hope is to arm potential investors with the knowledge they need, not only to survive in the property game, but to thrive.
Commercial properties and residential properties are the two categories the real estate market in India is divided into. One by one, this article hopes to provide information regarding both types of property available for investment in India.
Any property, whether a plot of land, or a building, when used to generate profits and capital gains, is known as a commercial property. Commercial properties consist of the following subtypes:
- Office buildings
- Retail outlets
- Miscellaneous (restaurants, hotels, hospitality, medical etc.)
Some of the factors all investors should not only look into, but study thoroughly before making the decision of investing in any form of commercial property are listed below:
1) Cash inflows: rent, fees, tax benefits, depreciation, parking etc.
2) Cash outflows: initial investment, taxes, legal expenses etc.
3) Project viability: A project is considered to be viable for investment only if the current cash inflow (after deduction of expected cost of maintenance et al as cash outflows) is higher than the outflow of cash.
4) Risk taking capacity: This is almost entirely dependent upon personal risk taking capacity, working capital requirements for other businesses, current market conditions, current tenants and the likelihood that they are going to renew their tangency or lease at the expiration of the current contract.
It refers to a land or built in property compared to commercial property which is more for business purposes. It involves a property purchased or built for personal use, most often to provide housing for families.
Investing in a residential property is more an emotional decision when one is buying it for personal use. Some will buy a house just because it is right for them in their opinion. The reason for which the investment is to be made is the key factor in deciding the investment zone. Having one residential property leads to both, mental and personal satisfaction. Stating that this is my house gives immense comfort. However, if you own one house already, investing in a commercial property is a better option on any day. Investing in a commercial property is a complete win-win situation as it leads to both capital appreciation and rental income. Rental income in a commercial property is around 3-4 times higher than that in a residential property.
The potential returns on investment, in a commercial property is 9-12% whereas in a residential property it is 3-4%. However, with the home loans becoming easier every man wants his own house so reselling residential properties may be easier if bought in a good locality with thorough research.
Another factor to be considered here is FAR. FAR refers to floor area ratio, which refers to the allowable area available for construction. FAR is higher for a commercial construction as compared to a residential building.
In case of investments two things to be kept in mind are good location and purchasing from a reputed builder. If the area is good, ultimately, the value paid would be realized now or later point of time. Also chances of getting tenants would be higher. Reputed builder gives a good name thereby making resale much easier.
If you are a new investor like 9 out of 10 are, these days, you would probably be content investing in a residential property, as this seems like a safer asset group and also provides one with a home to stay in and call their own. However, if you already own a house, it would be recommended that you buy a commercial property with an assured return rate of at least 12% and lease guarantee of 9% after possession. However, make sure to rent the commercial property to a tenant who is well established or has goodwill so that the market conditions do not play a role in making him delay the rent payments or vacate the property.