Commercial Real Estate VS Residential Real Estate
While commercial properties are primarily for housing businesses and generating profits for protracted time periods, residential properties are invested in, mostly for private use and seldom to foster income in the form of rent. While both commercial and residential properties have their share of merits and shortcomings, office or commercial properties will cost you a fortune. Still, they pay higher takings when compared to residential properties.
The decision to invest in either of the real estate markets is not a momentary one. The kind of property chosen by a real estate investor will be determined by their tolerance and the degree of risk, how liquid their capital is, the availability of time and funds, and their goals.
Commercial Real Estate Vs Residential Real Estate and their Scope of Investment:
Rate of Return or Yield
Taking a higher degree of risk yields higher revenue and hence commercial properties, certainly, generate more income, and their money is more attractive than residential properties. The rate of investment in commercial real estate is a whopping 4% higher than the rate of investment in residential real estate, said a study from the National Council of Real Estate Investment Fiduciaries (NCREIF).
Since office properties consist of larger spaces, they can accommodate offices for several firms, instigating more tenancy, which is beneficial to the investor.
Cost of Entry into the Field of Investment
For beginners or novice investors, investing in residential properties is always considered as the best option. It is because residential properties cost lesser than commercial properties and are inexpensive. What more does a tenderfoot want than to minimise his risk in investment?
Once the investor is in a position to receive a higher or fixed amount of profit from residential properties, he might gain the confidence to invest the retained profits from previous investments and the capital he already possesses, in commercial buildings to expand and diversify his portfolio.
The lot targeted or approached for tenancy in commercial buildings is sure to be qualified since they contact the investors of the same for office space rental purposes. They are mainly owners or managers of firms who want to rent a space for their office’s branch, while residential properties are for people who want to rent houses for fixed monthly or annual payments to owners.
So, while owners of residential properties have the benefit of their houses being treated and taken care of as their own by the lessees, acting as watchdogs to the property for longer periods of time, commercial properties, on the other hand, have the advantage of having renters who are more likely to follow the regulations and decorum of the property they have rented since there is backing provided by large companies who are tenants of the commercial space.
Commercial properties harbour longer lease terms than residential properties since commercial properties commonly lease for periods as long as 5 to 10 years and residential spaces, on the contrary lease for periods ranging anywhere for six months to 2 or 3 years, in most cases. For owners of office properties, there exist savings in terms of expenditure that would otherwise arise in the form of vacancy rates and turnover costs resulting in favourable and promising cash flows for investors, who are looking for stability in receiving a certain sum of income rather than marketing it now and then.
What is beneficial to residential investors, in this case, is that they can get their properties. These personally-screened and desirable tenants make the application processes and getting legal protection against frauds or complaints a much more convenient task when compared to the same being carried out in the case of commercial buildings.
Also, there is the existence of triple net lease in leasing commercial properties, which refers to the agreement under which the lessee or renter pays maintenance expenditure, insurance of the building or property and real estate taxes that are original to be levied on account of ownership of the said property which is a huge prerequisite to the owner.
Residential real estate has the advantage of leniency in zoning laws and regulations pertaining to certain permits, and laws are convenient and smallscale.
Performance in Economic Crisis
Residential properties perform better during times of economic crisis. Even in times of economic crisis, people are sure to rent homes, but since businesses are the ones to get impacted first and adversely during times of such crises, office spaces might not be in demand at a time like this. There is no guarantee that a firm will last or continue its business operations until the duration of the commercial lease lasts.
Since residential leases are shorter and are always in demand, they do not get affected as much as commercial properties do in the times of economic crisis.
Pool of Buyers and Tenants
The demand for housing is always aloft. Hence, residential properties attract a giant pool of buyers or investors and tenants or renters, in comparison with commercial properties, which rely on businesses. As companies have now progressed towards adopting online marketing or marketplaces, owners of such properties may find it back-breaking to attract tenants for their commercial spaces.
Investing in a particular type of property is a decision that is entirely in the hands of the investor. If the investor is an experienced risk-taker and a veteran in investing in real estate, he might opt for the purchase of commercial buildings or office properties. But if he is a fresher who wants to invest his stagnant savings in a property with a minimal amount of risk, he might be inclined to invest in a residential property.
Commercial Vs Residential Real Estate FAQs:
As per the norms of the Income Tac Act, 1961, if the property is held by the investor or buyer for more than three years, it is termed as along term capital gain and will be taxable at the required tax rate and on the other hand of it is disposed off in less than three years it will come under the short term capital gains section and depending on other incomes, it falls in the tax slab rate for short term capital gains slab.
The trend is more towards the Commercial Real Estate properties as far as NRI interests are concerned rather than in Residential properties mainly because of the low returns on investments. There have been certain factors prevailing like demonetisation and the launch of the RERA – Real estate regulation and development Act that has majorly affected the decline in the interest of the NRIS in Residential properties. Otherwise, commercial real estate is not more popular than the residential part, but it is almost at par by creating ample opportunities of a high rate of return and by creating a good demand for CREs in the market.
The main point to consider before making a high investment in property are as follows:
- Location – If the location is right especially in case of commercial real estate it has the power to yield in more power in terms of profitability, employment productivity and business. Location is the key factor to decide whether a buyer should invest in commercial real estate or not
- Return on Investment – In this case, ROI generated in case of commercial real estate is a sure shot winner as compared to residential properties. Commercial Property has the potential to generate an annual ROI of 10%-15% whereas Residential Property cannot generate more than 4% under the given circumstances. So, if Return of investment is the criterion, then the buyer must definitely go for commercial real estate
- Cost – As far as cost of acquiring the asset is concerned, then surely residential property is a winner over commercial real estate. Residential properties are much cheaper than CREs. They have the potential to gain loans and finances for up to 80% of the value of the property where it remains at 60-70% in case of commercial real estate. There are no tax benefits available for acquiring Loan on commercial property which is in the case of residential property. So, in this case CRE fails as compared to residential loans
- Risk – commercial real estate properties carry a much higher risk as it is used in business purposes and the risk of not dwelling will always remain.
Yes, POA can be revocable or irrevocable as per the conditions specified in the terms and conditions.
It is the investor or the buyer who needs to pay for other charges and fees regarding purchase of the property and even the stamps charges that are liable to be paid out only by the investor.