Build a property portfolio matching your needs
Residential and commercial real estate investments have their pros and cons. Your investment decision should reflect your capacity and more importantly,your needs
Investing in real estate is clearly a trend today,and there are various options available such as commercial,residential,retail etc. Before purchasing a new property for investment purposes,one should always keep in mind the differences between investing in residential and commercial property.
Depending on your financial position,expectations and investment plan,one has to decide which one can be profitable for you. The majority invest in residential properties,as it seems to safer and requires lower investment and bank financing too,is available rather easily. On the other hand,commercial property can also be highly profitable if you have the means to invest.
Buy-to-let residential property assures rental yields every month. Some investors also purchase property,solely for resale in future. Residential property investments can be in traditional apartments,below market value properties and foreclosure properties.
Commercial properties include apartment blocks,office buildings,hotels,restaurants,warehouses,industrial buildings etc. Managing a residential property involves lesser hassles than commercial properties,which usually requires professional property management expertise.
While some knowledge of the real estate market and current conditions is required to make a successful investment,residential properties are simpler to research and value. It is relatively easier to compare properties,prices and investment potential in a given area.
Commercial properties,however are often different and require special knowledge,so that valuation can be accurate and an investment plan can be established. Builders are offering under construction/ ready-to-move commercial properties with assured rental return after possession and interest till the construction period. Residential properties are generally regarded as low-risk investments. They are more affordable,especially if one has just started building up his investment portfolio. The relatively low risks and the low purchase price,however,will also mean that profits are lower,and the return on investment will be mainly from increase in capital value.
Commercial properties,tend to have higher risks,but also higher potential returns. The significantly higher prices would also mean that only collective investment schemes are affordable for larger commercial property investments,for personal investors. While residential property prices generally double every 5-7 years,this is not true for the latter. One can expect a net yield of up to 7-10 per cent on commercial properties,which is higher than the net yield from traditional residential property investments,and a large part of the return on investment will be in the form of rental income.
Residential leases are usually around one year,and private tenants are often considered less reliable than businesses. Landlords usually pay for repairs,and that means unexpected additional costs.
Commercial properties are usually leased for 3-9 years,and the yearly increase in rental yields is more significant. Tenants are considered more reliable and are generally required to pay for repairs. While commercial properties can fetch a secure and high rental income,it is also much more difficult to find commercial tenants.
Residential property can be sold easily,and with the property in a good condition and in a good location,it does command higher prices,assuming that the market mood is positive at the time of sale.
The process for resale of commercial properties is complicated. The sale must be to another investor or group,and it should have a successful and profitable record,to be attractive to buyers. To summarise,residential real estate may be a better option for a person with limited corpus and commercial would make sense for a savvier investor. If you have the money,you should go for a right mix of both.
Author is MD,Bajaj Capital
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