What is commercial and residential in real estate- who's Invest is more riskierSamar Javed24 August 2019
Any property, be it residential or commercial, maybe a good opportunity for investment. Typically, investing in commercial real estate can bring in more financial gain than investing in properties used for residential purposes. However, the risks are also more. Let us understand in more detail.
What is a commercial property?
Any real estate property that is used for business purposes is known as commercial property. The term usually refers to buildings that have businesses operating out of them, but it can also be used to refer to land that is meant to produce a profit, and also the bigger residential properties. When you designate a property as “commercial” there are implications on the tax levied, building finance, and the laws that govern it.
Commercial property can refer to any of the following:
- Grocery stores
- Shopping malls
- Office buildings
- Manufacturing shops
- And more.
The Advantages and Disadvantages of Commercial Real Estate
Like we discussed, a number of properties can be classified as commercial real estate, including retail outlets, warehouses, office buildings, and raw land. The single thing they all have in common is that they are all designed to generate income. For example, an office building would produce rental income from the tenants of the building. A plot of land can be bought and sold to a property developer for a profit.
If we look at the advantages of commercial real estate investment, the thing that stands out is the potential for earning money that such a commercial property in all places have. A good example of this is if you invest in an office building in a city, where the rate per square foot is extremely high, then you can charge higher rates as well. If the demand stays high and you have low operating expenses, you can see a good return on your investment.
However, this return on investment does not come without a price. To manage a commercial property, you need more than one person. You will probably need to recruit a professional property manager who will search for and vet tenants, manage lease signing and look after day to day running of the building.
Also, you must pay for the maintenance and upkeep of the building. All these costs can add up and cut into the revenue that you are earning from the building. And unless you are investing via a crowd funding platform or buying shares in a real estate investment trust, you will need to make a big upfront payment to invest in a commercial property.
A Look about Residential Real Estate
It can be assumed that investing in a residential property for sale everywhere you are will probably not be as stressful as investing in commercial real estate. You can handle just one tenant rather than multiple tenants. The continual maintenance expenses will be less, especially if you are buying a one family house.
An entry into the residential real estate market is also easier because you will not need as much money to begin with. If you are trying to do house-flipping, for example, you can get a short-term loan and pay very little money from your own pocket (at least at the time of taking the loan). However, remember that since these loans usually allow you to make interest-only payments, you must be confident that you can sell the house and not get stuck with a huge amount to repay.
And of course, investments in residential properties also have their disadvantages. You will be incurring more risk with a single tenant because if that tenant moves out on short notice, you will not earn on that property unless you find another tenant. If you took a loan to buy the rental property, you would have to make the payments to the bank out of your pocket until you can get another tenant.
It is also more difficult for residential properties to offer similar returns as commercial properties. If the house needs extensive maintenance or your house taxes are suddenly hiked steeply, then your profits will be affected majorly.
Advantage and disadvantage Of Residential Property Investing in India
- No requirement of minimum or lowest size of Property.
- Loan is easily approved with minimum documents.
- Leasing process is very easy with a written on 50 Rupees Stamp Paper.
- The capital values of residential properties tend to remain stable for minimum periods of time.
- Low monthly rental income.
- Rental agreement usually cannot exceed 3 years.
What one should real estate developers?
This question can be answered only if you know what you want to get out of investing in real estate. Invest in commercial properties for more returns, but if you prefer working on a smaller scale, residential properties can be more appealing. If you take some time to consider how much time you want to devote to your project and the tolerance for risks, then it can be easier to make the decision.
You should do your research on real estate developers in all places and then select the right type of property to invest in.