Investment in Residential Or Commercial Property - Which is Better?

Investment in Residential Or Commercial Property – Which is Better?

Arvind Jain, Managing Director – Pride Group

Residential and commercial property investment is the obvious choice for most property investors, but there are essential differences between these two asset classes. When the choice falls between either residential or commercial property investment in India, residential does have certain advantages. In most Indian cities, there is usually more than sufficient demand for housing unit, and demand drives up property prices. This is why many Indian property investors prefer residential real estate – they are assured on steady rental income as well as capital appreciation.

However, property investors focused on rental income must be aware that there are many overheads to be borne. The cost of maintenance, insurance and repair of the property must be borne by the landlord. Also, local tenancy laws often prevent landlords from raising rents according to their expectations.

Property investors should also factor in that tenants in a residential property usually prefer to go in for short leases, which means reduced assurance of steady rental income from a single occupant. Nor can tenants be easily evicted if they fail to pay rent or if a higher-paying tenant comes along. Rental yields in India are actually among the lowest in the world, and rarely exceed 3.5% even in a city like Mumbai. This is why most residential property investors focus more on capital appreciation, which can be as high as 15-20% for well-located properties in the primary cities.

Is commercial property a better investment option? It all depends on the investor, and particularly his or her financial clout and risk appetite. Investment in commercial property invariably involves a much higher financial outlay than residential, and one also needs to choose the location far more carefully. While residential property tends to find buyers or tenants in most locations that offer sufficient transport and social infrastructure, commercial real estate investment must be finely focused on high-demand locations.

However, this is effort and money well spent for serious long-term property investors, since leasing out a commercial property involves less hassles than a residential property. The owner of a commercial property is usually not limited by standard lease parameters, and the terms and conditions presented in the lease documentation are pretty clear and non-ambiguous. In other words, this asset class can make more sense while deciding between residential and commercial property investment.