Real estate investment in India is a lucrative strategy to earn returns. But you can not simply go around a whim when trying to make a sound investment in real estate. You may face many challenges while investing in real estate such as income uncertainty, taxes, maintenance of property, coping up with the local regulations and difficulty in finding tenants. The major challenge and question is what type of property should you choose if you want to invest in real estate to yield higher returns on investments? Residential or commercial? We have analysed both the options to help you in making the best investment decision.
Difference Between Commercial and Residential Real Estate
Residential properties include flats, apartments, bungalows, villas, penthouses and many more. The owner of the property has the option of residing there or renting out space for rental revenue. On the other hand, the commercial property comprises shops, offices, hotels, industrial buildings, basically used for non-residential purposes. In the context of tenants, residential properties are rented out to families or individuals, while commercial properties are leased to companies or business owners.
Some Essential Considerations For Real Estate Investment in India
The initial cost of investing in residential property is lower as compared to commercial properties. If you do not want to take a loan as a novice investor, at the same time, you do not have sizable savings for down payments on commercial real estate, then investing in residential properties would be a sound decision.
Return on Investment (ROI)
Commercial property tends to be much more expensive to enter, yet it remains a popular form of real estate investment in India because it offers higher returns. The return on investment from commercial properties in India ranges from 8% to 10% per annum. In some exceptional assets and locations, the ROI can reach 13% in India. The estimated overall return on investment in the case of residential properties lies between 3% – 4% per annum. Therefore, the returns on investing in commercial properties are more appealing than residential properties.
Commercial lease agreements are signed for one year to 10 years or more, while residential lease agreements are signed for 3 to 5 years. Hence, commercial tenants sign long-term contracts than residential tenants, which guarantees a consistent income from the commercial property, making it a good investment. It translates to decreased vacancy rates and turnover expenses in commercial real estate investment in India.
Performance in Economic Crisis
Businesses are generally the first to bear the brunt of an economic downturn, which can have a variety of consequences for commercial investors. The fact that housing is always in demand will benefit residential property owners.
While real estate investment in India can be a rewarding experience, it also comes with its own set of risks. So, investing should be approached with caution and careful diligence. Before investing in a commercial or residential property, you should look into the builder’s track record, location and previous pricing trends to ensure that you make a sound investment decision.