Commercial Vs. Residential Property Investment: Which One Will Fetch You Pore Profit?
Investors seeking to diversify their investments away from stocks and bonds to supplement their incomes should consider real estate in Kolkata as a potential option.
As a result of volatility in the real estate market, you might be contemplating as to which is a more profitable investment: residential properties or commercial properties.
So, to clear the air, we have explained the benefits and challenges of each type of investment.
Benefits of Investing in Residential Properties
A larger pool of prospective renters and buyers – Since everyone needs a place to live, it is far easier to attract residential tenants. Therefore, the high demand for residential property is an excellent investment opportunity for real estate investors.
Lower tenant turnover rate: As a residential real estate investor, you will not be burdened with the problem of vacancies and finding tenants now and then. Moreover, if you focus on acquiring long-term tenants, you can rest be assured that they will treat the property as their own home.
Performs better in economic downturns – When the market crashes, businesses are the first to suffer the repercussions. Hence, it is much easier to overcome economic downturns with residential properties than with commercial retail spaces. This is because, irrespective of the economic condition, people need a roof over their heads. Consequently, renters prioritize paying rent to have a place to live.
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Risks associated with Residential Investment
Shorter lease tenure: Residential properties need to be leased annually, and the rental agreement usually cannot exceed 36 months. As a result, the vacancy risks are higher.
Lower return on investment: The rental income and the cash flow return for residential properties typically range between 3 to 5 percent. It is because businesses can afford to pay much higher rents than individuals.
Benefits of Investing in Commercial Properties
Longer lease tenure: Long-term rentals can provide long-term stability without the hassles of changing tenants or finding new ones regularly. A commercial property lease typically lasts a lot longer than a residential lease, lasting anywhere from three to five years for a short-term lease and upwards of ten years for long-term leases. Thus, it assures the investor of a consistent cash flow.
Triple Net Leases: It requires that the property owner only pays the mortgage and shoulders no property maintenance expenses. The tenant is supposed to incur all the property related expenses, including the real estate taxes and utilities such as electricity, water, etc.
Qualified Tenants – The interest of the commercial tenants and property owners to maintain the integrity of the property is aligned. Tenants who neglect to upkeep the property will likely make their clients form a negative impression of the company. So, they become bound to respect the property.
Risks associated with Commercial Investment
Significant upfront investment: A building costs more than a single-family home. Commercial properties typically require a 25% down payment. Not to mention, commercial loans come with higher interest rates and requires the investors to have a concrete business plan and an impressive credit score.
Property value takes time to escalate – Commercial property values remain stable for extended periods, with an escalation possible only after every 3 to 5 years.
It is no small task to figure out whether to invest in a commercial or residential property. The decision will boil down to your risk tolerance, financial goals, the time factor, property potential, and access to liquid capital.
As with any other investment, you’ll need to consider your comfort level in this case as well.
You can reach out to us for a clearer vision.