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Investing in Commercial Property vs Residential Property – Which is Better?

Investing in Commercial Property vs Residential Property – Which is Better?

Hunting for a new property for investment? Well, like most potential investors out there, you might be a little confused about which property to park your funds in – commercial or residential. Deciding between commercial property vs residential property is not one of those decisions you can make overnight. Each option offers its own set of benefits as well as challenges.

As an investor, the path you choose to take will depend on your goals, liquid capital, risk tolerance, and time. Here are some points of comparison to help you decide.

Returns

Returns for property investments depend on various factors like cost of entry, appreciation, and rental potential. In terms of cost of entry, the cost of investing in a residential property is most certainly less than that of a commercial property. However, when you consider the rent potential and longer lease terms, the overall returns on commercial properties exceed residential properties.

On average, commercial properties offer higher rental rates than their residential counterparts. Moreover, a commercial property’s lease period is much longer when compared to residential properties. Where residential leases typically range from 6-12 months, commercial leases last from anywhere near 5-10 years. For investors, this translates to lower vacancy rates, lower turnover costs, and a reliable and stable cash flow.

Additional Read: Top Builders for Buying Commercial Properties in 2021

Price appreciation

The property values are determined differently for commercial and residential properties. For residential property, the price is influenced by comparable properties, location, and surrounding infrastructure. In contrast, the value of a commercial property depends on the cash flow it generates – the higher the amount of cash a commercial property is making, the higher the property value will be.

If you want to buy commercial property, make sure you or the tenants who have leased your property have a steady enough cash flow. With such tenants, you could witness an increase in value at a much faster rate than a residential property.

Additional Read: Impact of Smart Cities on Indian Real Estate Industry

Risks

You might have heard the phrase, “With great risks come great rewards.” That is precisely the case with commercial properties and their ROI potential. For instance, during an economic crisis, residential properties perform well, whereas businesses are the first to feel the heat from the economic downturn.

Also, commercial investors hoping to attract tenants during an economic slowdown may find marketing to be particularly challenging. Though not immune to the effects of a financial crisis, residential properties are in demand all year round, unlike commercial properties.

Loan

Unless you have a huge lump sum amount ready, you may need to borrow some capital for your investment. When it comes to loans, home loans have a relatively lower interest rate than commercial property loans.

Also, tenure for a commercial property loan is usually shorter than loans for residential properties. You also get a somewhat lower loan-to-value ratio with commercial loans. Where you can fund up to 75%-90% of a house’s value with a loan, you can only fund up to 55% – 60% of commercial properties’ value using a commercial property loan.

Over to you

Thinking of buying a new home? Well, opting for Tata Capital’s housing finance can give you the financial boost to purchase your dream home. Our loans come with attractive home loan interest rates, flexible tenure, and easy-to-meet eligibility criteria.

Start planning today with our home loan EMI calculator!

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