Which is more attractive: Rental income from residential or commercial property?

If you are planning to invest in property to earn returns, which type of property should you choose – residential or commercial? We analyse the benefits and drawbacks of each

People often do not recognise the difference between residential and commercial properties, while making an investment and therefore, tend to focus on just one type. The leasing businesses in the residential and commercial segments, have completely different dynamics, points out Kirti Timmanagoudar, partner, BrickEagle. “Rental housing evolved as a concept in India, to cater to the acute housing shortage of affordable homes. The operating expenses of rental housing properties are minimal, as the tenant only requires basic, yet functional infrastructure,” says Timmanagoudar.

“On the other hand, commercial property investments (i.e., offices and malls) typically entail high investment and come with leasing and vacancy risks. Moreover, there’s a direct impact of the economy and real estate market cycles on this segment. This is unlike housing, which is uncorrelated with markets, as it is end-user driven and there exists a huge shortage,” she elaborates.

 

Residential versus commercial realty spaces

  • Commercial properties are always costlier compared to residential, unless you are investing in individual shops.
  • Commercial properties have longer lease periods and higher rental value, compared to residential projects.
  • For repairs and maintenance, the tenant is generally responsible for it in commercial properties, while it is entirely the landlord’s responsibility in residential properties.

See also: Renting out your apartment and living on rent: The pros and cons

 

Which is more attractive for rental income?

“While commercial properties are more complicated in terms of legal aspects, they have longer leased periods and can get you higher rentals, if you get a good deal for a longer period of time. The rental value of a residential property does not go down if the market is slow, unlike commercial properties. However, one should be well-versed with how the commercial realty market works, before venturing into it,” suggests Sushil Raheja, CEO, Raheja Homes Builders & Developers.

Experts believe that commercial property investments can fetch anywhere between 6%-10% rental yield, depending on the quality and location of the asset. However, capital appreciation is limited. Many institutional funds are focusing on this segment, for medium to long-term investments.

In India, yields on housing rentals, when managed by individuals, are not attractive on ready-to-occupy properties. However, if we consider rental housing on a large scale, with institutional or large investors who enter at an early stage, it is likely to give superior returns akin to commercial properties.

Residential properties are less complicated and easier to understand for a new investor. One can ascertain its value through comparisons, while this may not be so easy in the commercial segment. However, the commercial segment can fetch excellent income. You can expect at least Rs 40 lakhs as annual income, by investing in a property worth Rs 4-5 crores in a prime location.

While the rental returns from a commercial property are generally higher in comparison to a residential property, buyers should remember that it is subject to various factors, such as right selection of property, location, procurement price, prevailing market conditions, etc.

 

Residential versus commercial spaces: Benefits and drawbacks

Residential property Commercial spaces
Benefits
Steady rental income that goes up, as the property’s value increases. Regular and handsome rental income opportunity.
Availability of tax benefits. If you select a prime location like Mumbai or NCR, chances are, you may get good return from tenants.
Freedom to use the property as you want – you can move into it or give it on rent or even set up a personal office space. Longer lease periods.
A lifelong asset that can be passed on to the next generation. Rental value increases with capital appreciation, over time.
Drawbacks
Regular maintenance and upkeep of the house. One may not be able to keep the property vacant for long, as it may affect cash flows.
High risk of possession delay. The investor must be willing to take a risk, with higher amount of capital.

 

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