As a first-time investor, you might be faced with the common dilemma of whether you should invest in commercial or residential property. While many newbie investors think that residential investment is a safer choice, the truth is that commercial real estate offers a significantly higher rental yield than its residential counterpart and can be a highly rewarding form of investment when done correctly.
Here is a comparison of investing in commercial vs. residential real estate.
1. Investment cost: The upfront investment cost of commercial property is higher than that of residential property, but the payoff is much better in the long run.
2. Capital appreciation: A commercial property in a prime location is likely to remain in demand and appreciate steadily regardless of the market conditions. This also makes it a fairly risk-free investment.
3. Rental yield: Commercial property serves as a source of regular and sizeable rental income. The rental yield on commercial property is significantly higher than that of its residential counterpart. The rental value of commercial property also increases with capital appreciation.
4. Tax benefits: As a homeowner, you can avail of certain tax concessions, which may or may not be associated with the purchase of commercial property.
5. Lease period: The lease agreements for commercial properties are typically signed for a period of 5 years at a time (as opposed to 1 year in the case of residential property) and include the clause of a marginal increase in rent every year, irrespective of the market conditions. This guarantees regular and increasing rental income, without the hassle of looking for a new tenant every year.
6. Possession: Residential property comes with the risk of delay in delivery and possession, which is less likely to happen with commercial property.
7. Repairs and maintenance: The cost of maintenance and repairs must be borne by the homeowner in case of residential property, whereas these costs are borne by the tenant in the case of commercial property.
8. Tenant profile: Commercial properties in a good location attract reputed tenants, such as banks, retail chains, known brands and business houses. This further enhances the visibility and value of the property. Tenant profiles for residential properties are unregulated.
9. Loan advantages: It is much easier to get a loan sanctioned for a commercial property than it is for a residential property. You can also opt for hedge funds and other methods of financing the property.
Whether you are a first-time buyer, seasoned investor or business owner, you can benefit in many ways by choosing to invest in commercial property over residential property.
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