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.

India's real estate landscape is undergoing significant transformation, driven by rapid economic expansion and the burgeoning growth of urban centers such as Mumbai, Delhi, and Bangalore. This economic surge has resulted in an extraordinary demand for both residential and commercial properties, creating a fertile ground for investment. The adoption of cutting-edge technologies like virtual reality (VR) and augmented reality (AR) is further accelerating this growth. These innovations have fundamentally changed how properties are marketed and experienced, offering potential buyers immersive, virtual tours that provide a comprehensive understanding of prospective investments. Despite occasional setbacks from regulatory changes and market fluctuations, the resilience of the Indian real estate market remains evident. The vast population, combined with ongoing urbanization, ensures a continuous demand for housing and commercial spaces. Government initiatives, such as "Housing for All" and smart city developments, are boosting confidence in the market's long-term potential. These initiatives not only increase demand but also present opportunities for developers and investors to engage in large-scale infrastructure projects. The introduction of real estate investment trusts (REITs) has also democratized the commercial real estate market. Previously accessible only to institutional investors, REITs now allow retail investors to diversify their portfolios and benefit from the sector's growth. Economic Expansion and Urban Growth India's economic growth has been a key driver of urban expansion. Major cities like Mumbai, Delhi, and Bangalore have become bustling economic hubs, attracting people seeking better job opportunities and living conditions. This influx drives demand for residential properties while also spurring the development of commercial spaces. The synergy between economic growth and urbanization creates a robust foundation for the real estate sector, ensuring a steady flow of investment opportunities. Technological Advancements The real estate sector has embraced cutting-edge technologies such as VR and AR, revolutionizing property marketing and visualization. Potential buyers can now experience properties through immersive virtual tours, gaining a more profound understanding of their investments. These technologies not only enhance the buying experience but also allow real estate marketers to reach a broader audience, increasing the sector's appeal. Resilience Amidst Challenges The Indian real estate market has demonstrated remarkable resilience despite challenges such as regulatory changes and market fluctuations. The regulatory environment, though complex, is designed to enhance transparency and protect buyers' interests. While these regulations can create short-term uncertainties, they ultimately contribute to a more stable and trustworthy market. Market fluctuations, driven by economic cycles, are a natural part of the investment landscape. The Indian real estate market's ability to recover from downturns highlights its resilience and long-term growth potential. Population Growth and Urbanization India's large and growing population, coupled with urbanization trends, ensures a continuous demand for housing and commercial properties. As people migrate to urban areas seeking better opportunities, the need for residential and commercial spaces increases. This ongoing demand creates opportunities for developers and investors across various market segments, from affordable housing to luxury residences and commercial properties. Government Initiatives and Infrastructure Development Government initiatives like "Housing for All" and the development of smart cities are key drivers of the real estate market's long-term potential. "Housing for All" aims to provide affordable housing to all citizens, driving the construction of millions of new homes and stimulating demand. Smart city projects focus on creating urban areas with modern infrastructure, sustainable living solutions, and advanced technologies. These initiatives attract both domestic and international investors, eager to capitalize on India's evolving infrastructure landscape. Real Estate Investment Trusts (REITs) The introduction of REITs has opened the commercial real estate market to retail investors, previously dominated by institutional investors. REITs allow individuals to invest in income-generating real estate assets without owning or managing properties directly. This democratization of real estate investment offers new opportunities for portfolio diversification and income generation. REITs, traded on stock exchanges, provide liquidity and regular income through dividends, making them an attractive investment option. Challenges and Future Prospects While the Indian real estate market faces challenges such as regulatory complexities and market fluctuations, its dynamism, supported by technological advancements and favorable government policies, underscores its resilience and attractiveness. Regulatory measures, though challenging, aim to streamline the sector, enhance transparency, and protect consumers. These regulations contribute to the market's long-term stability and credibility. Looking forward, the Indian real estate sector is poised for continued growth, driven by urbanization, technological integration, and supportive government policies. The focus on affordable housing, smart city initiatives, and the growth of REITs will attract more investors and developers. Technological advancements will further enhance real estate marketing, property management, and investment strategies, increasing the sector's efficiency and appeal. In conclusion, the Indian real estate market offers a blend of opportunities and challenges, making it a compelling investment arena. The dynamic interaction of economic growth, technological advancements, and supportive government policies creates a resilient and attractive investment landscape. For those seeking long-term growth and diversification, the Indian real estate market presents promising prospects, underpinned by the nation's expanding economy and urban development.