In life we come across many catch-22 situations when it becomes difficult to select any 1 option. One such dilemma is investment decision related to Commercial Property vs Residential Property. 1st Real Estate investment is always Residential as we feel more secure in our own home even though it is mortgaged.
Commercial Property vs Residential Property dilemma arises when you start searching for 2nd Property. This itch starts immediately after 1st Home Loan Closure or if you have surplus funds for investment. Let us try to solve both of this puzzle of Commercial Property and Residential Property.
The valuation of Commercial Property is highly dependent on Location. Though it is important for Residential Property also but Location is much more critical for Commercial property. Any wrong decision related to location can eat into your entire investment. If you finalize right location for commercial property then you have hit the gold mine. Between Commercial Property and Residential Property, this point clearly favors Commercial Property i.e. Right Location can give much higher returns in Commercial property compared to Residential Property.
2. Return on Investment:
In terms of Return of Investment between Commercial Property and Residential Property, Clear winner is Commercial property. Commercial Property has potential to deliver annual yield of 10%-15% whereas Residential Property cannot yield more than 4% under any circumstances.
Residential Property is much cheaper compared to Commercial Property considering initial cost of investment. Secondly, you can avail maximum loan of only upto 60% on commercial property whereas on residential property, maximum loan of 80% can be availed. Thirdly, ROI on Commercial Property is normally 2%-4% higher than Rate of Interest on Residential property. Lastly, there are no tax benefits available on Loan for Commercial Property. Without any doubt, Residential Property has advantage on this parameter.
4. Risk Factor:
Commercial Property is high risk investment compared to residential property. The biggest risk carried by Commercial Property is of Stereotyping e.g. if any commercial area is stereotyped as market for clothes then you can’t do any other business in that area. Besides Stereotyping Commercial Property carry risk of economic slowdown, low demand or competition from other locations or builders. Residential property is relatively immune from the risk factors & clear winner on this point between Commercial Property vs Residential Property.
5. Lease Period:
In case of residential property, you have 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. But on the other hand, nothing like this can be done in case of commercial property. Not only this the lease period is usually much lengthier in case of commercial properties.
On overall basis, there are different situation in case of a buyer of a residential property and that of commercial property. But in my personal opinion and from investment perspective, you should buy at least 1 Commercial Property. Any wise investment in Commercial Property can be equivalent to wise investment in 3 Residential Properties. If you cannot buy commercial property at this stage due to high cost then it is advisable to keep investing in other avenues which can be liquidated in future for the purchase of commercial property.