Let us run a quick test. What is the primary motivation of an investor for investing in real estate? It is Rental income.
Let us run a quick test. What is the primary motivation of an investor for investing in real estate? It is Rental income. It is the first thing that comes to mind when considering purchasing a property for investment purposes. It is common knowledge that rental income from real estate generates passive income.
So, finding a good tenant along with capital appreciation is the ideal motivation for a real estate investor. Are we all set to go? Not just yet. We have all wondered, “Where should I or what types of property investment invest to earn a high rental income?”. Commercial or residential? It is the million-dollar question that a property investor asks before investing his hard-earned money in real estate to earn a rental income. However, residential and commercial property investments have their advantages and disadvantages.
After overcoming the challenges posed by the Coronavirus pandemic, the Indian real estate sector is back on the rise, positive, and on the road to a solid recovery. Residential and commercial real estate sectors in cities like Pune are optimistic about long-term growth.
However, the perennial question of where to invest — residential or commercial — lingers in the investors’ minds.
Residential vs Commercial: The Best rental income properties in India?
- Is Residential Property better for High Rental Income?: The investors are primarily motivated to invest in residential properties and earn rental income. It gets driven by several factors, including easier residential property acquisition or construction, fewer approvals, faster clearances, a lower initial investment, and easier resale. Also, residential properties are more likely to find tenants than commercial properties.
However, when we look at historical ROI, we can see that rental income returns from residential properties are significantly lower than those from commercial properties. Rental income returns from residential properties can be expected to be around 2% per year on average. Let us use an example: a luxury 3 BHK flat worth Rs 2.5 crore in an upscale Gurgaon neighborhood is likely to command monthly rentals of Rs 40,000 to 42,000, or Rs 4,80,000 till Rs 5,04,000 lakh per year. Furthermore, the rate of appreciation is highly dependent on a variety of factors such as location, the presence of physical and social amenities, the city, and the connectivity quotient.
A significant advantage of residential property is that the maintenance costs are much lower when compared to large commercial properties. It is a critical consideration because these fees can eat up a significant portion of the rental income generated by property investment. If you have a limited budget, residential property is a better option.
- Is Commercial Property better for High Rental Income?: Shops, offices, warehouses, Godowns, and showrooms are examples of commercial properties. Commercial property investment has a higher rental yield than residential property investment. Rental income returns from commercial property investment can get expected to exceed 8% per year. Although commercial property investment requires a big initial investment than residential property, the attractive rental returns more than compensate for the initial investment jitters. If the rental returns get understood through an example, a 429 sq ft shop in Gurgaon priced at Rs 35,000 per sq ft will fetch a monthly rent of Rs 1,07,250 or more than Rs 12 lakh per annum. Furthermore, the rate of appreciation of commercial real estate is faster than that of residential properties. But, a high maintenance cost can be a detriment. It can cost up to Rs 7-12 per sq ft per month. Commercial lease or rent agreements are typically long-term, leaving little room for frequent tenant changes and rent negotiations. It is a more reliable source of rental income than residential investment.
So, what are the best rental income properties in India if you have a shoestring budget?
The Indian real estate market offers investors numerous investment opportunities. As we have seen above, commercial properties provide higher rental income than residential properties. But what if you want to invest in real estate like commercial properties to earn a high rental income yet have limited capital? Is that the end for you? No. If you want to invest in real estate to earn rental income but have a limited budget, residential property is a better choice. Investors must select the investment option that will generate rental income. The options listed below provide the best rental income properties in India.
- Affordable rental housing: Rental housing is in high demand among the country’s low-income demographics. Rental housing is the only option for daily wage earners and migrant workers from the informal sector. Government reports also estimate 26 to 37 million households in metropolitan India live in informal housing. As a result, investing in the low-cost housing sector returns a higher rate of return.
- Airbnb rental properties can range from a rustic cabin in the countryside to a sprawling 6-bedroom mansion in the city. In recent years, this type of housing has grown in popularity. It has several advantages over traditional rentals, but it also has some disadvantages. One benefit is that you can charge a higher nightly rate. In a typical model, if you have a hot property that gets booked for the majority of the month, you can expect to make significantly more money than if you only have one tenant.
- Co-living housing: There is a huge untapped demand for co-living homes among millennials in India. It consists of students and migrant working professionals between the ages of 18 and 35. Millennials account for more than 30% of the population of India, so if you are looking for a place to invest in real estate, co-living homes provide both demand and opportunity. Real estate experts report young professionals and students living away from home prefer co-living space. It is because the rental income of the room decreases when it gets shared by two or more people. The bedroom takes up only 40% of the total area. Thus, co-living is a better option for tenants.
Which cities in India have the highest rental rates?
India’s metropolitan cities are at the top of the list of locations with the highest rental income. The renting business in India allows landlords to earn lakhs of rupees in cities such as Mumbai, Delhi, Bengaluru, Gurugram, and Pune.
- Mumbai, the city of dreams, is one of the best places to invest in real estate. Despite its reputation for cramped quarters, the rent in this city is quite high. Malabar Hills, Bandra, Worli, Chembur, Malad East, Juhu, Prabhadevi, and Agripada are well-known for burning a large hole in the tenant’s pocket.A two-bedroom apartment can rent for up to INR 4 lakhs per month, while the owner of a fully furnished three-bedroom house in some of these areas can expect to charge up to INR 15 lakhs per month.
- Delhi NCR: Beautiful residential properties can be found in Chanakyapuri, Jor Bagh, Hauz Khas, Vasant Vihar, Green Park, Satya Niketan, and many other areas of Delhi. These are some of India’s best rental income properties. The monthly rent for a house in these areas can exceed INR 10 lakhs.
- Pune and Bengaluru: Even though property prices in Bengaluru are lower than in Mumbai and Delhi, rents are rising rapidly. As a result, it is one of the best cities in India to invest in real estate. On average, the monthly rent for a 2BHK apartment in the city ranges between INR 20,000 and 30,000. However, there is a trend of seeking an initial advance rental of 11 months, making it a lucrative deal for the landlord.
Pune is close behind. This well-developed city is home to several lovely residential communities that command a high monthly rent. This makes it an excellent choice for real estate investment in India.
Finally, an investment in the residential real estate segment is recommendable if the budget and maintenance capacity is limited, frequent tenant turnover is not an issue. However, if money is not an issue, a commercial real estate investment will produce far better and faster returns than a residential apartment or villa. So, before investing their hard-earned money into a property business for rental income, investors must exercise caution and consider all factors such as budget, amenities and connectivity, security, and market presence.
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New High Rental Income Property Types In India FAQ’S
The four types of real estate are:
- Residential Real Estate
- Commercial Real Estate
- Industrial Real Estate
The classification of rental income gets determined by the business line of the owner. Income from renting immovable properties (Land and Buildings) is taxable under two sections of the Income Tax Act: Income from House Property (HP) and Income from Business and Profession (PGBP).
Commercial real estate is regarded as one of the best types of real estate investments due to the potential for higher cash flow. It offers higher income potential, longer lease terms, and lower vacancy rates than others.