Residential or commercial property-Where should you invest?
Hey! You already live in a self-owned house and a friend of yours has come up convincing you to buy another flat in his newly constructed residential building! Think twice before investing in it if making profits is your motive. Real estate …such a common term these days, when minting money is concerned, right? But, one wrong decision can make us loose a part of our initial hard-earned money as well. I have made attempts to give you an overview of different types of properties and their investment ideals, which may help you in taking better decisions.
When we think of investing in properties the two broad categories, which come into our mind are: commercial properties and residential properties.
Commercial property refers to any property being land or building intended to generate profits from capital gain (capital appreciation) and rent. Commercial properties include:
1. Office buildings
3. Retail outlets
5. Miscellaneous (restaurants, hotels, hospitality, medical etc.)
What factors should be kept in mind before investing in a commercial property?
1) Cash outflows: initial investment, taxes, legal expenses etc.
2) Cash inflows: rent, fees, tax benefits, depreciation, parking etc.
3) Timing of cash inflows and outflows: If the present value of cash inflows (after deducting expected cash outflows for maintenance etc.) are greater than cash outflows then the project is viable.
4) Risk taking capacity: This depends upon personal risk taking capacity, working capital requirements in other businesses, current market conditions, current tenants and the likeliness that they would renew their tangency or lease.
It refers to a land or built in property compared to commercial property which is more for business purposes. It involves a property purchased for individual use most often to provide housing for families.
Residential property Vs commercial property, where to invest?
Investing in a residential property is more of an emotional decision when buying it for personal use. Some people buy a house just because it is RIGHT for them. The reason for which the investment is to be made is the key factor in deciding the investment zone. Having one residential property leads to both mental and personal satisfaction. Stating that this is my house gives immense satisfaction. However if you own one house already, investing in a commercial property is any day a better option. Investing in a commercial property is a complete win-win situation as it leads to both capital appreciation and rental income. Rental income in a commercial property is around 3-4 times higher than in a residential property. The possible return of investing in a commercial property is 9-12% whereas in a residential property it is 3-4%. However with the home loans becoming easier every man wants his own house so reselling residential properties may be easier if bought in a good locality with thorough research.
Another factor to be considered here is FAR. FAR refers to floor area ratio, which refers to the allowable area available for construction. FAR is higher for a commercial construction as compared to a residential building.
In case of investments two things to be kept in mind are good location and purchasing from a reputed builder. If the area is good, ultimately, the value paid would be realized now or later point of time. Also chances of getting tenants would be higher. Reputed builder gives a good name thereby making resale much easier.
If you are a new investor like 9 out of 10 persons you would also be satisfied investing in a residential property, this sounds a safer asset group and also provides own home to stay in. However if you already own a house, I would suggest you to buy a commercial property with an assured return rate of at least 12% and lease guarantee of 9% after possession. However make sure to rent the commercial property to the tenant who is well established or has goodwill so that the market conditions do not play a role in making him delay the rent payments or vacate the property.
Happy investing in Residential property or Commercial property!!!
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Team – Myinvestmentideas.com
Residential or commercial property-Where should you invest