7 ADVANTAGES OF COMMERCIAL REAL ESTATE OVER RESIDENTIAL REAL ESTATE FOR RENTAL INCOME

Commercial real estate has long been a popular asset type for investors seeking strong returns. Investing in CRE has a number of advantages over other return products such as fixed deposits, debt funds, and so on, especially for NRI investors.

NRI investors may diversify their portfolio by investing in rent-generating commercial properties in Tier 1 cities in India, thanks to tech-enabled commercial property investment platforms like Assetmonk. Assetmonk offers individuals, who want to invest in commercial real estate but don’t want to deal with the hassles of managing a physical property, the opportunity to own institutional-grade commercial real estate through a thorough research process. Assetmonk helps customers with their investing difficulties and offers a variety of CRE investment options. NRIs are investors from a variety of industries, including oil and gas, financial services, technology, and manufacturing. Here are some of the advantages and drawbacks of CRE investment.

The “yield,” or the rental income that an investor obtains from investing in a leased business property, is what makes commercial real estate so appealing. It’s worth noting that this is ‘All-in’ pricing, not a purchase price. Many inexperienced investors compute yield incorrectly as rental income, ignoring other acquisition costs like registration and stamp tax, lawyer’s fees, brokerage, and so on. These expenses can add up to ten percent to the buying price, lowering the return by ten percent.

CRE rates may range from 7-9 percent, which is significantly higher than the current 4-5 percent available on alternative investment options. NRI investors may improve their income even more in instances like the COVID-19 outbreak by taking advantage of the rupee/dollar exchange rate decline. The return can rise from 8% to 8.4% with a 5% depreciation.

What Is The Distinction Between Residential And Commercial Real Estate?

The following are the technical differences between a residential and commercial property:

• Single-family houses and one to four-unit rental residences makeup residential real estate. Commercial property, on the other hand, is defined as anything with five or more units.
• Residential real estate includes condos, duplexes, and quadruples, whereas commercial real estate includes office, retail, industrial, multifamily (five units or more), hotel, and special-use buildings.
• The sort of tenant that each property gets is another significant distinction between commercial and residential properties. Families and individuals often lease residential buildings, whereas businesses typically lease commercial properties.
• Finally, each property type offers a unique set of possibilities. Commercial real estate tends to provide investors with a considerably broader selection of investing options. Commercial property investment funds, for example, outnumber residential property investment funds. Residential real estate investing, on the other hand, tends to provide investors a more active involvement in the property.

Commercial Real Estate Investing Benefits

1.                  Higher Profits:

You’ve probably heard the phrase “more risk, greater reward,” and this is certainly true when it comes to commercial properties and higher returns. Commercial property cash flow and rental  income are significantly more appealing than residential property cash flow and rental income. Commercial real estate investments have an annual average rental income of 12.7 percent compared to the S&P 500, which has an average annual rental income of 8.8 percent over the previous 15 years, according to the National Council of Real Estate Investment Fiduciaries (NCREIF) Property Index.

2.                  Qualified Tenants:

It might be difficult for investors wishing to rent out a single-family home (or a modest multi-unit property) to locate qualified tenants who will keep the property in good condition. Commercial renters, on the other hand, are usually firms, corporations, or similar entities. Because they are backed by a bigger corporation, they are more inclined to respect the property and its regulations. Qualified renters, while not always the case, will make any property owner’s job simpler.

3.                  Triple Net Leases:

While triple net leases differ from one situation to the next, they are tremendously beneficial to commercial real estate investors. With a triple net lease, the property owner is not responsible for any property expenditures. Since the lessee is responsible for all property expenditures, including real estate taxes, the property owner is responsible for paying the mortgage. Large corporations will generally sign this form of lease to keep a consistent appearance and feel. As a result, they control such expenditures while the investor bears almost no maintenance fees. What a win-win situation. Various net leases are available to investors; however, a triple net lease only advantages commercial buildings.

4.                  Longer-Term Leases:

Commercial leases are often significantly longer than residential leases, which normally last six to twelve months. It’s fairly unusual for commercial premises to be leased for five to ten years. For investors, this implies lower vacancy rates and turnover costs. For investors concerned about promoting a home from year to year, the extended lease agreements suggest consistent, positive cash flow. For long periods, commercial investors may be stuck with less-than-ideal renters. Nonetheless, with the proper application procedure and legal safeguards in place, investors may avoid any long-term problems.

5.                  Increased Value Is Easier:

How property valuations are calculated is one of the most significant variances between residential and commercial real estate. While similar properties have a big influence on residential real estate, income has a big impact on commercial real estate. Simply, the bigger the amount of cash flow a commercial property generates, the higher its value. Investors might experience far faster growth in value than residential properties if they find the appropriate tenants.

Before making a final investment choice, smart investors understand the necessity of weighing all the advantages and disadvantages. These advantages of commercial real estate investing, on the other hand, are indisputable.

Commercial vs. Residential for rental income

Shops, offices, warehouses, Godowns, and showrooms are all examples of commercial buildings. Commercial properties provide a high rental income when compared to residential property investments. The annual rental income on commercial property investment can be estimated to be in excess of 8%.

Although commercial property investing requires a larger initial investment than residential property, the favorable rental income more than makes up for it. A 429 sq ft store in Gurgaon, priced at Rs 35,000 per sq ft, will rent for Rs 1, 07, 250 per month, or over Rs 12 lakh per year, if the rental income is understood from an example.

Furthermore, as compared to residential homes, commercial real estate appreciates at a higher rate. A hefty maintenance expense, on the other hand, might be a deterrent. Depending on the type of property, it might cost anything from Rs 7 to Rs 12 per sq ft per month. Furthermore, commercial leases or rent agreements are often long-term, leaving little flexibility for frequent tenant changes or rent negotiations. They have shown to be a more reliable source of rental income than residential investments.

Finally, if your budget is tight, your maintenance capacity is limited, and frequent tenant turnover isn’t an issue, investing in residential real estate is a good idea. Commercial real estate, on the other hand, will provide significantly greater and faster returns than a residential flat or villa if budget is not an issue. Before putting their hard-earned money into a property company for rental income, investors must exercise caution and analyze all elements such as budget, amenities and connection, security, and market presence.

Residential vs. Commercial Electricity Rates

The energy utilized in business and residential buildings is of the same quality. Electric providers frequently offer discounts and various pricing to commercial property owners since they buy power in bulk. These commercial power prices frequently help company owners to save money on their electricity bills. Electricity providers will be able to recover enough revenue for their energy because of the volume they must consume.

What Is Passive Commercial Investing, and How Does It Work?

Individuals can engage as a limited partner in commercial real estate enterprises through passive commercial real estate investment. While an investor can become the direct owner of a commercial property, the amount of funds necessary to do so is often prohibitive. For individuals wishing to earn a livelihood in real estate, rehabbing, rehabbing, and wholesaling commercial and residential buildings is an excellent exit plan. Investors seeking a more diverse and balanced approach to real estate investing, on the other hand, may be better suited reconsidering these tactics and electing to develop a portfolio of passive commercial real estate assets instead.

Commercial vs. Residential: Building Costs

Even though the properties are of comparable size, the expenses of commercial and residential real estate are frequently very different. Materials, compliance regulations, expenses, personnel, and equipment are among the cost variances.

When compared to residential real estate, the number of skilled employees and the utilization of specialized equipment designed specifically for commercial construction can significantly boost expenses. Overhead, labor and equipment expenditures in residential real estate may be quite high. Building residential real estate, on the other hand, seldom compares to the expense of commercial real estate because it is done on a much smaller scale.

Choosing between a commercial and residential investment property is a difficult task, especially when each has its own set of advantages and disadvantages. Both will diversify your portfolio, both will provide considerable tax benefits, and both will move you closer to financial independence… So, how does an investor make a decision?

The answer to that question is ultimately determined by what they want to achieve from real estate investment. Investors should consider their short-term and long-term objectives. If they want to get started quickly, repairing or wholesaling a residential property may be the way to go. Commercial properties, on the other hand, provide appealing benefits if they are in it for the long haul and want to generate passive income.

If you want to maximize your profits, you should consider investing in commercial real estate. Residential homes, on the other hand, may appeal to you if you like working on a smaller scale. It’s simpler to pick where to spend your money if you consider how much time you’re prepared to dedicate to your project and your risk tolerance.