Commercial or Residential Rental Income: Which is Better?

Rental income is an important factor for a number of people who want to invest in real estate sector. In situation like covid – 19 pandemic when people force to stay at home during lockdown then steady income like rental income appeared as an important source of income to the real estate investors. But before investing a big question may arise to you i.e. whether invest in commercial sector or residential sector?

Although both the investment in commercial and residential sector have their own advantages and disadvantages but you should need to confront with them. So that you can finally decide which sector of investment i.e. residential or commercial is more suitable for you for rental income.

Are you confused about where to invest for attractive rental income i.e. either residential sector or commercial sector? Then this blog is very helpful for you where the detail explanation is given and based on this you can choose whether choose residential or commercial sector for attractive rental income.

What is Residential Real Estate Property?

The real estate properties that are used for various residential purpose is known as residential real estate properties, like house, residential flat etc.

What is Commercial Real Estate Property?

Commercial real estate properties refer to those properties which are mainly approved, designed and built for various commercial purpose like business activities etc. The example of commercial properties are – hotel, office space, restaurant, and warehouse etc.

Calculation of Rental Income From Commercial and Residential Real Estate Property in India

Both the residential and commercial real estate rental income depends on some common factors like location of the property, quality of construction, age of the property and usage etc. But beside that, there are also some specific factors which individually influenced the rental income of a commercial or residential sector.

The calculation of rental income from commercial properties in India is influenced by a number of factors such as – current leasing environment for commercial sector, distance from the company head centre or office, location of surrounding complementary and auxiliary industries, status of various legal clearances, insurance types of the building, surrounding infrastructure situations etc.

On the other hand the amount of rental income is largely depends on the liveability environment with respect to the surrounding social infrastructure like neighbourhood behaviour and profiles.

Amount of Rental Income From Commercial and Residential Sector in India

The amount of rental income is observed to be in generally low for residential properties than commercial properties in India. For residential property the amount of annual rent is mainly ranges between three to five percent of the market value of the property.

Due to the expenses in various sectors like – insurance, property tax and maintenance, the net yields tend to be in the range of two to three per cent per annum for residential real estate sector in India. On the other hand the annual rental income from commercial property generally ranges between six to ten per cent. But due to the expenses like – insurance, property tax and maintenance, the net yields tend to be in the range of five to eight percent per annum for commercial real estate sector in India.

The rental income for residential properties increases at a rate of five to seven percent per annum. On the other hand for commercial properties the rental income increases in India at a rate of three to five percent per annum.

Risks and Rewards for Both Commercial and Residential Real Estate Properties in India

Although the rental gain from commercial real estate sector is generally high than residential sector but there are some other factors which may shape your investment destination for attractive rental income, such as,

Tax Benefits: A residential house property that is buy on home loan may claim tax benefits under Section 24 and Section 80C of Income-Tax Act. But a commercial property does not claim for this kind of tax benefits.
Risk and Volatility: A greater level of risk and volatility is observed for residential real estate properties because of frequent change in tenants and tenant risk, higher maintenance and upkeep costs and lower returns. On the other hand commercial properties ensure lower risk and volatility by ensuring a long term and stable returns with low tenant risk.
Entering and Exiting an Investment: With the help of Real Estate Investment Trust (REIT) it is now easier to create for an investment portfolio in commercial real estate sector than residential real estate sector for an individual in India. REIT make the commercial real estate properties to be more liquid in nature than residential real estate properties.
Legal Complications: Legal complications is observed as more for commercial properties than residential properties. If you are a new investors or have lack of time in hand to do a proper market research before investment then it will be better for you to go for investment in residential real estate sector.
Tenure: The tenure for residential real estate property is general low in India and it is around one year in most of the cases. On the other hand the tenure for commercial real estate property is generally higher than residential sector i.e. generally 10 years or above. Therefore, if you want to use the property for your personal use in near future (for example within two to five years) then go for investment in residential real estate sector.
Lease Process: The lease process for residential sector is easier than commercial sector.
Loan Availability: Loan facility is observed to be easier for residential real estate than commercial.
Increase of Rental Income: The rate of increase of annual rental income is observed as higher for residential real estate than commercial.
Size of the Property: In generally the commercial real estate required larger space than residential.
Offload: The process of offload is comparatively more difficult for commercial real estate as there is low number of buyers in commercial real estate market than residential.

On a Final Note

The amount of rental income is generally high for commercial real estate properties than residential. There are advantageous and disadvantage of investing in residential as well as commercial sector for rental income.

Depending on your risk taking capability, knowledge and experience in investing real estate sector you need to decide where to invest i.e. whether residential or commercial. The above mentioned facts should help you a lot in finalizing your decision.