By: shubham mittal
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Commercial Property Vs Residential Property: The Ultimate Investment Faceoff
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By: shubham mittal
- November 15, 2023
Do you find choosing the right real estate investment opportunity challenging for yourself? Are you looking for the path that will lead you to greater financial prosperity in the world of property investment? One of the most significant confusions you will face while looking for the same is the choice between commercial and residential property. Commercial property vs residential property is a long-going battle faced by investors. Both options promise unique advantages and potential pitfalls. Investing in real estate is a smart and great way to earn some money. But, it proves to be a smart move only when you make the right choice.Â
Unlike what is usually believed, choosing between residential and commercial property for investment is not just about preference. It holds the power to shape your financial future, making it crucial to choose wisely between the two. It is one of those decisions in life that will define your success. None of the options is greater than the other. Each has benefits and risks, making them suitable for some individuals and unsuitable for others. This shows that real estate investment is not a one-size-fits-all scenario and needs to be understood in detail. Hence, to decide between commercial and residential property for investment, one must thoroughly learn about both options' advantages and disadvantages.Â
In addition to the benefits and drawbacks of commercial and residential property investment, one must also consider several other factors. These factors include tax implications, rental income, long-term appreciation and market trends. To help you make your decision-making process more accessible, we have developed this post to unravel the intricacies of the ultimate residential vs commercial real estate debate. After reading this blog post, you will be empowered to know what type of property will be the right option for you.Â
What is Residential property?
As the name suggests, residential property is the real estate used for housing purposes. The sole aim of these properties is to provide shelter, comfort and a sense of belonging to the ones residing in them. Unlike commercial property, this type does not cater to business activities and is primarily intended for personal use. The value of these properties varies based on amenities, sizes, location and overall real estate market conditions.Â
Types of Residential Property
Residential property can be categorised into several types. Some of these types include the following.Â
Apartments/ flats
One of the most popular residential properties in crowded towns and larger cities are the apartments/ flats. These residential units are arranged in a building consisting of several floors. Usually, flats or apartments are located in walled and gated societies composed of several buildings. The flats in a single project are more or less of the same design, and they might differ in size and configuration. The projects containing these apartments also have varying amenities like a gym, a temple, a playing area, a grocery store, a parking facility and a maintenance team.Â
Single-family homes
Usually known as Freehold residential property, Single-family homes are free from the hold of any entity besides the owner. These homes might contain one or two floors. The main living area in these homes is on the ground floor, and the bedrooms are on the house's second floor. They do not share walls and are built on a single lot. The owners build these houses themselves or with the help of a contractor. As a result, they get the freedom to design the home just as they want it to be.
Condominiums
Condominiums are the residential property types situated within a building. Such a building consists of various houses known as condominiums. People confuse this property type with flats. However, the two are pretty different. Unlike apartments, condominiums may have multiple floors. Also, these residential units might be designed differently than others in the same building. The walls of condominiums are common with the neighbouring units. A single homeowner's association maintains the condominiums in a building, and the owners must pay a maintenance fee to these associations. These buildings contain commonly shared luxurious amenities like a parking lot, swimming pool, power backup and recreational area.Â
Bungalows
Another type of residential property is the bungalow. These are single-storey homes with multiple large-sized rooms. One of the most crucial factors differentiating bungalows from single-family homes is that these do not contain various stories. Bungalows have only ground-floor establishments. As a result, all the components of the house are on the same ground floor.Â
Multi-family homes
When multiple families come together to build a home, such a house is known as a Multi-family home. These homes can have multiple floors or be a row of houses sharing common walls. In such a case, every house belongs to the individual family. Also, these units have separate entry and exit and common entrances to common areas. The design of multi-family homes is consensually decided by the families pitching in to build them.
Advantages of investing in Residential property
If you are not entirely convinced of investing in residential real estate, you must learn about the many advantages you can relish if you invest in this property type. Some of these advantages that will solve the residential vs commercial real estate debate for you to a much greater extent are listed below.Â
Stable and growing rental returns
One of the first and most crucial advantages of investing in this property type is that the rental income increases steadily. If a home purchaser does not use it for themself, they can rent it out and earn substantial rental incomes. The rents can be improved with time regularly.Â
Affordability
Another benefit of investing in residential property is that these properties are available even at prices suitable to low budgets. You can invest in a flat or apartment if you have a limited budget. However, you can consider investing in villas and bungalows if your budget is not limited.Â
Easy purchase process
Next on the list of advantages of investing in residential property is that purchasing it is hassle-free. These purchases have no hidden charges, and the procedure follows complete transparency. Also, buying this property type does not involve many legal formalities.
Tax benefits
Taxation and GST payments are not needed for residential property purchases. Also, self-employment tax is not applied to the income generated by these property investments.Â
What is Commercial property?
Property used for business activities comes under Commercial real estate. These include buildings that house businesses, lands that generate profit and large residential rental buildings. Commercial properties include grocery stores, industrial estates, malls, offices and manufacturing shops.Â
Types of Commercial Property
Commercial property can be categorised into the following types.Â
Office buildings
One of the most common types of commercial properties is office buildings, commonly found in tier 1, 2 and 3 cities. These buildings are usually tall and consist of several office spaces. These buildings might be owned independently, or the ownership might be shared with other investors.
Retail properties
Retail properties include malls or a clutch of shops. These properties are equipped with elements of informal and formal structure. Also, these properties can be multi-tenanted and single-tenanted.
Industrial properties
Industrial properties are usually situated outside city areas and are larger than other property types. They can be old or new. This property type includes warehouses, factories, research centres and development facilities.
Hospitality properties
These are resorts, motels, hotels and other property types. Hospitality properties include properties meant for short stays of the travellers. You can invest in such ventures and earn regular income by leasing them.Â
Advantages of investing in Commercial property
High rental yield
Investing in commercial properties is favoured by investors as it offers a high rental yield. The rental income acts as a passive source of income for the investors and purchasers. This income increases with time as the value of property increases.Â
Diverse real estate market
When you decide to invest in the commercial real estate market, you get numerous options according to your specific budget and preferences. From malls to retail shops, you can invest in varying property options.Â
Great appreciation potential
Another advantage of investing in commercial property is that they have high growth potential that maximises your returns. However, several factors determine the ROI of these properties.Â
Business expansion opportunity
When you invest in commercial property, it opens the door for business expansion. If you have a business of your own, you can use some space in these properties for it and expand it.Â
Difference between Commercial and residential property
Learning about the difference between commercial and residential property is crucial to comprehend which option will be better for you. Below is a detailed differentiation between the two.Â
Electricity rates
The source of electricity supply is the same for both properties. However, the charges differ for both. Commercial properties have higher electricity charges than residential ones.
Loans
Another factor crucial in the commercial property vs residential debate is the loans granted. The loans provided for residential properties are granted to the individual owner. On the other hand, the loans for commercial properties are given to the business entity. Â
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Risk profile
Next on the list of factors differentiating the two is risk profile. If you invest in commercial real estate and lease the property, a regular income source will be fixed for a long time, and the tenure of the commercial lease period is quite long. However, if you give your residential property on rent, the tenants usually pay monthly rent, and the rental agreements are for shorter periods.Â
Returns profile Return on investments is one of the most crucial factors determining your right choice. Research shows that the ROI of commercial properties is much higher than that of residential properties. However, location and several other aspects decide the ROI. So, choose wisely.Â
Summing up Commercial property vs residential property is a long-running debate with no end, as no one answer suits all. Several factors like budget and ROI determine which property type is suitable for investment. Therefore, use the above guide to find the right option for yourself. Also, if you are looking for the best commercial and residential properties for investment in India, explore Home4us' website today to get the best options based on your preferences.Â
Frequently Asked Questions
Should I buy commercial property for investment? Investing in commercial property is one of the smartest moves for a secure financial future. However, you must consult a real estate expert before deciding on anything.Â
What is the best return on investment for commercial property? On average, the Return on Investment for commercial properties remains 5- 8% per annum. However, in some cases, it might go up to 12% per annum.Â
What commercial property has the highest ROI? Studies suggest that commercial properties such as student housing, apartment complexes, storage, and office buildings offer the highest ROI.Â
Is commercial property costly compared to residential property? Usually, commercial properties are priced higher than residential ones as they have high-income potential and more taxes are laid on their purchase.
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