Real estate is the best form of investment due to the guaranteed, dependable, and infallible profits and higher returns. There are many ways to invest in real estate, of which the most prominent are residential real estate and commercial real estate. Choosing between commercial and residential real estate investing is a million-dollar question. So, is it better to own commercial or residential real estate? Where to invest for better returns? Commercial real estate.
When COVID-19 besieged the country, causing lockdowns, the uncertainty in equity markets and the low returns in the debt market drew many investors to other investment options. Not surprisingly, the Indian real estate sector attracted USD 5 billion in institutional investments in 2020, accounting for 93 percent of transactions recorded the previous year.
We Indians have always had a soft corner for two investments: gold and real estate. Residential real estate is still a popular theme due to the homeownership sentiment of real estate. However, many investors are now seeing the potential of investing in commercial real estate in India and the numerous benefits that come with them.
There are thousands of residential properties available with tempting offers. But, they do not provide the same returns as commercial properties and carry the same risks.
So, let’s take a look at some reasons why commercial real estate may be a better investment than residential real estate.
Firstly, what is commercial and residential property?
Commercial real estate is an umbrella term for crucial market segments such as retail, office, and industrial properties. Apartments, daycare centers, condominiums, movie theatres, parking lots, industrial floors, warehouses, and retail spaces occupied by brands such as Big Bazaar, Croma, and others are among the properties in this category.
In a nutshell, commercial real estate is any property that can get used explicitly for business purposes (CRE). There are now multi-use spaces that can get used as both commercial and residential areas.
Do not miss 8 Common Misconceptions About Commercial Real Estate.
Residential real estate encompasses housing that gets typically rented rather than owned by the owner. That may appear overly simplistic, but it is the same. Residential real estate refers to any property built solely for a living (RRE). They can also get used in multi-purpose spaces.
Commercial real estate v’s Residential real estate: The distinction?
The fundamental contrast between commercial real estate and residential real estate is how they get rented or leased, as well as the legalities involved. The aspect of investing in either of them differs, even though the underlying principle remains the same.
Another significant distinction between commercial and residential properties is the type of tenant that each building attracts. Residential real estate is typically leased to families and individuals, whereas commercial gets typically leased to businesses.
Finally, each property type offers a unique set of opportunities. Commercial real estate typically provides investors with a range of potential investment opportunities. There are more commercial property investment funds than residential investment funds. Residential real estate gives investors a more active role.
Is commercial property a better investment than residential?
- Better Returns: Commercial properties provide good rental returns over long periods. Because the housing market has yet to recover from the pandemic, it will take some time for prices to rise. Grade-A office properties are already yielding high returns due to their high demand. The expected return on residential properties is around 3-4 percent, while the expected return on commercial properties is 8-10 percent.
- Increasing demand: Work from home will not become the new normal in India, according to Anarock research. People prefer to return to work due to huge family sizes, small homes, inconsistent internet speeds, and vulnerable digital platforms. Furthermore, the emergence of new businesses registered increases the demand for commercial properties. Since the lockdown, approximately 16,000 new companies have gotten registered. In addition to start-ups, multinational corporations are looking to India as a hub for Data Center Offices and large commercial spaces, particularly in Tier 1 cities. Barclays, the international banking behemoth, opened its second-largest office in Pune. Large IT firms and corporations are looking for office space in Pune. Other major cities are not far behind from the increasing demand for commercial space.
- Consistent cash flow: The lease period for commercial properties can range from two to ten years. There are numerous benefits to having such long lease periods. You will always have a consistent cash flow from regular rentals. Second, you won’t have to worry about finding new tenants every few months. Residential properties have erratic cash flows as a result of short lease periods. The lease is usually only for 11 months.
- Easier upkeep and maintenance: Residential properties spend a lot of money on attractive lifestyle amenities such as swimming pools and kid’s play areas. Commercial properties focus on facilities that can improve work capabilities and create a healthy and positive work environment. As a result, commercial properties have fewer larger-than-life amenities than residential properties. Thus, the maintenance cost is lower. Furthermore, unlike in residential real estate, where the owner is always responsible for the upkeep, the tenant bears that burden in commercial real estate.
- Triple-net lease: The triple-net lease is another advantage. It is a lease agreement where the tenant is responsible for all ongoing building expenses such as maintenance, taxes, and insurance.
Real estate remains one of the most promising investment options, and with the pandemic slowly receding, this market is bouncing back in most major cities. For example, in Pune, which is emerging as the commercial real estate hub, IT hiring increased by 12% in May 2021. It also suggests that major IT firms and multinational corporations are shifting their focus to Pune.
Do you want to invest in commercial real estate too? Assetmonk is a WealthTech Platform that provides opportunities to invest in institutional-grade commercial real estate. We offer properties after thorough due diligence, and our products have an IRR ranging from 14 to 21 percent. It also provides commercial real estate fractional ownership. For more information, contact our team.
Reasons To Swap Residential Real Estate Investments With Commercial Real Estate Investments FAQ’S:
Conversion of residential to commercial involves the following process:
- Pay a visit to your city’s municipal government.
- Submit a request to the municipal office to convert the residential to commercial.
- Provide information about your company, such as company registration documents and a company ID.
- The size of the company and the nature
- The address
- Once your application has gotten reviewed, the authorities will look into your company.
- Your application approval will be in the hands of the Municipal commissioner if he determines that there will be no harm to the other residents of that locality; only then will your application be considered.
You can use your residential for commercial purposes if your society’s management and zoning rules allow it. Some states have more lenient laws than others, allowing doctors, lawyers, and others to use up to 30% of their residential for commercial purposes.
Commercial properties, as opposed to residential properties such as rental apartments or single-family homes, typically provide a greater financial return. When compared to other types, they provide excellent appreciation over more periods. Investing in a premium commercial property through REITs or fractional ownership may also give attractive returns with a much lower and more manageable investment.
Commercial real estate is an umbrella term for crucial market segments such as retail, office, and industrial properties. Apartments, daycare centers, condominiums, movie theaters, parking lots, industrial floors, warehouses, and retail spaces occupied by brands such as Big Bazaar, Croma, and others are among the properties in this category. It gets used explicitly for business purposes. There are now multi-use spaces that can get used as both commercial and residential areas. Residential real estate encompasses housing that gets typically rented rather than owned by the owner. That may appear overly simplistic, but it is the same.