Real estate,both commercial and residential,are considered to be great investment vehicles. Either avenue can have a tremendous impact on your net worth. However,a majority of people think only of residential property when they think about investing in real estate. While this is certainly the most viable route for many people,commercial property can offer
additional benefits that residential real estate cannot.
What are the differences between residential and commercial properties?
Although the principles of investing are the same,one should be aware of advantages and disadvantages of both. The factors that determine the differences between residential and commercial real estate are cash flow,rentals,tenants,propertyvalue,financing,etc.
Residential tenants are mostly available,regardless of the economic condition. This is because most people want to live and rent in places close to their friends,families,job location,educational institutions,etc. Commercial leases are also powerful when it comes to rent payments. Unpaid rents can result in rent penalty and consequently eviction.
It is easy to sell houses than commercial lots because demand from buyers is always there. It is possible to buy a residential property with a small down payment and getting 80 percent mortgage financing from the bank. Most banks are willing to lend more for the housing market around 75 per cent or more but less on commercial market 60 per cent or less.When it comes to mortgages,residential and commercial loans are again different,with various financing options catering to each type of investment.
Rental lease is fairly standard,short and easy to understand in residential properties. Landlords and tenants do not have difficulties in understanding these documents,whereas in commercial properties,the lease document itself is quite long,containing many clauses. One needs to study the lease carefully and understand the terms with the help of a competent lawyer.
Also,both residential and commercial property owners can experience some bad tenants,except that the latter has the upper hand. When it comes to eviction,the landlord has the right to remove the tenant by performing specific actions for eg changing locks,seize premise according to the lease document.
Overall,both residential and commercial properties have their own strengths and weaknesses. However,to begin with,most real estate investors should start investing in residential sector before stepping into the commercial arena.
Even though there are differences between the two,one should not conclude about which one is the better,since both serve different purposes.
Benefits of investing in commercial property
The leases of the commercial property are usually longer than the residential ones anywhere between 3 to 20 years,and they are quite often secured by bank guarantees. The rent is reviewed once in 3 years and is usually increased by 15 per cent every three years. Moreover,commercial tenants will maintain the property better,as the physical look and condition of the property is important to their business and their staff. But many commercial leases also have added protection for the owner in the form of make good clauses,maintenance clauses and management clauses. The RoI on commercial properties ranges between 7 per cent to 10 per cent net after all costs. The other benefits of commercial real estate are that it gives access to more capital and is also less competitive. Commerical real estate also brings in Forced Appreciation.
Benefits of investing in residential property
You need a smaller deposit for a residential property,which can be important,particularly if this is your first investment. Depending on your credit history and income,you may even borrow 100 per cent of the purchase price. Commercial mortgages require a deposit of at least 30 per cent. The lenders are much stricter on borrowing criteria for commercial properties,and if the property is not let at the time you purchase it,it has a high maintenance cost.
The commercial property market can be less predictable than the residential market where historically properties tend to double in value every 5 to 8 years. There are also different kinds of commercial properties to consider such as commercial,industrial and retail. With proper research,you may find that you are more comfortable making the decision about which type of property to invest in.
Although residential leases are shorter than commercial ones,residential properties are generally easier to let,meaning you will have less time when the property is
vacant. It can take months to find a new commercial tenant.
Therefore,whether you choose residential or commercial property,the more you know about your market,the safer your investment will be. It is up to investors themselves to decide which type suits them best based on their current financial situations and personal goals.
Author is Managing Director,Bajaj Capital
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