Know the distinctions between investing in commercial property and residential property, providing insights into each type of real estate investment.
Residential Property
Are you tired of untimely calls to fix that leaking tap, or tenants routinely leaving your house because they changed jobs? Is your landlord threatening to evict you and your established business out of his Residential property? Let’s see what commercial property is and the benefits of commercial property.
Whether you’re an investor in real estate, a property owner thinking of whether to rent out your space as a commercial unit or a businessman confused between using a residential unit as an office or renting a commercial space, you should consider the following advantages a commercial space has over a residential property.
Click Here For Online Property Registration. Let’s dive into the 6 commercial benefits.
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Comfort, Constancy and Collateral value:
Commercial spaces by virtue of their location (proximity to markets, malls, shopping centres) are likely to fetch you businessmen and entrepreneurs who would want to own the place for longer durations, ensuring you a fair return for a longer time. This enhances the stability of your investment and reduces potential losses. Both tenants and landlords benefit from this.
The tenants get the security of fixed overhead expenditures, and landlords get fixed returns, which are also looked upon favourably by banks. Contrary to residential contracts, most are yearly or eleven-month-long, requiring several renegotiations. People may also leave the city for various reasons, such as changing jobs or getting married, whereas businesses are less likely to dissolve.
2. Negotiating Responsibilities:
In most standard residential contracts, landlords are responsible for major repairs, maintenance, and overhauling. Due to the fact that these are year-to-year leases and since either party can easily vacate the property (usually 30 days’ notice), the landlord should pay for maintaining the services for the next tenant.
In commercial properties, companies appreciate the freedom to move furniture and fixtures and modify them to suit their needs.A company’s logo is often incorporated into the décor. Repairs and maintenance are generally covered by these organisations.
3. Reduced chances of default:
This may not be a blanket rule, but medium to large companies are less likely to default in the payment of rent, unlike small residential tenants with limited household resources. Because of the goodwill associated with their brand and their need for stability, companies are more likely to negotiate a fixed-sum deposit because they are more likely to pay upfront. Furthermore, due to the additional investment by your corporate tenant, they wouldn’t want to leave anytime soon.
4. No rent control laws, strictly:
While residential property rents may be escalated only up to the limit prescribed by the state’s own rent control law. There is no such clause for commercial property. The more established a business gets in a location, the less likely they would be to undertake a change of location. And would be willing to pay more to keep your property. If you’re the rare owner of property somewhere at Whitefield in Bangalore or a BKC in Mumbai, your rentals may enable you to afford that private jet.
5. Grading, Returns, and Risks:
Ever heard of a house-property being given A, B or C grades based on their quality? There is no such system for residences. In contrast, most commercial properties fall into three categories. A class A building has the best amenities and aesthetics. A class B office space may be old but fetches above-average rent. Class C buildings are low quality and cheap.
Historically, commercial properties in Grade A have offered a return of 9-11 percent. Grade B properties fetched around 7-9 percent. Tenants gain more value and better rents through this classification. Additionally, it has a higher rate of return and lower risk.
6. Exemption from RERA provisions:
While most spaces are built for a mixed corporate, technical, IT business let-out or sale, if a builder is making ear-marked spaces only for an ‘industrial purpose’, the entire project would lie outside the purview of the Real Estate Regulation Authority. And thus, the obligations such as increased disclosure, post-possession liability. And restrictions on the use of funds would not apply, as in the case of all residential property projects.
7. Growing demand
Anarock’s research indicates that working from home won’t replace traditional office job in India. Most people want to return to the workplace due to larger family numbers, smaller houses, variable internet connections, and vulnerable digital platforms.
Additionally, the growth of new companies that register each year is driving up the demand for commercial real estate. The Central Registration Center reports that since lockdown, around 16,000 new companies have been registered. Along with start-ups, global corporations are looking for huge commercial spaces in Tier 1 cities and seeing India as the centre for Data Center Offices.
Barclays, a major global corporation, just opened its second-largest office in Pune. Corporate and major IT companies are searching for office space in Pune. When it comes to seeing the rising demand for commercial spaces, other metropolises are likewise not far behind.
8. Easier maintenance and upkeep
Commercial properties prioritise amenities that can improve job skills and foster a healthy, happy work environment, whereas residential properties invest a lot of money in providing appealing lifestyle amenities like swimming pools, kid’s play spaces, etc. Consequently, commercial properties have lower maintenance costs than residential homes since they have fewer extravagant features.
In addition, the renter in commercial real estate bears the responsibility for maintenance, as opposed to residential real estate where the owner is always in charge.
The triple-net lease is an additional advantage. In this type of lease arrangement, the tenant is in charge of paying all building-related continuing costs, including taxes, insurance, and maintenance costs.
Ultimately, real estate remains one of the best and most promising investment opportunities, and as the pandemic is gradually brought under control, this market is recovering in most major cities.
Advantages of Commercial properties
Commercial properties come with many advantages, but they also carry risks that can be reduced by modifying your rental contract. In some cases, tenants are locked in for a long period. It prevents the landlord from evicting the tenant.
In general, investors benefit from longer lock-ins. Letting out the property for long periods has inherent risks. As the landlord, you should seek a higher security deposit in such a case.
Differences between Investing in Commercial Property and Residential
| Aspect | Commercial Property | Residential Property |
| Purpose of Investment | Typically for business use or rental income from commercial tenants. | Primarily used as a place of residence or for rental income from residential tenants. |
| Rental Income Potential | Generally offers higher rental yields due to longer lease terms and higher rent per square foot. | Rental yields are typically lower compared to commercial property. |
| Tenant Types | Tenants are usually businesses, corporations, or retailers. | Tenants are individuals or families seeking housing. |
| Property Management | Often requires professional property management due to complex leases and maintenance needs. | Property management may be simpler for individual homeowners or small landlords. |
| Lease Terms | Longer lease terms (e.g., 3-10 years) provide stability but may require negotiation and legal expertise. | Shorter lease terms (e.g., 1-year leases) offer flexibility but may result in more frequent turnover. |
| Property Location | Location is critical, with proximity to business centres, transportation, and target customers being essential. | Location factors often include proximity to schools, amenities, and quality of life. |
| Capital Investment | Typically requires a higher initial investment compared to residential properties. | Generally more accessible for individual investors with lower capital. |
FAQs On Commercial Property and Real estate:
Is commercial real estate a good investment in India?
Commercial real estate can be a viable investment in India, offering the potential for stable rental income and capital appreciation. However, it depends on factors like location, market conditions, and investment goals.
What are the benefits of investing in commercial property?
Benefits include higher rental income, longer lease terms, the potential for lower maintenance costs, and the opportunity to diversify your investment portfolio.
Why do investors invest in commercial real estate?
Investors are attracted to commercial real estate for its income potential, stability, and potential for wealth accumulation through capital appreciation.
Which type of commercial property is best?
The best type of commercial property depends on your investment goals. Options include office spaces, retail properties, industrial warehouses, and more, each with its own advantages and considerations.
How do you generate income from commercial property?
Income is generated through rental income from commercial tenants. Leases are typically longer and may include provisions for annual rent increases and shared expenses.
Conclusion
Therefore ,It is true that commercial properties have better returns and lower risks than residential properties. The tax advantages of residential property may differ from those of commercial property and may be higher. There is some truth in the saying ‘The safest way to make money on property is to buy land before everyone else’s arrival’.
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