Investing in Commercial Property
With the growing financial literacy in India, new investment opportunities pop up every day for investors. From stocks to bonds and cryptocurrency, there are comprehensive investment options out there. Real Estate investment is one such option that holds the potential of earning high returns, growth, and passive income. Commercial or residential property can serve as a great investment option. However, investing in commercial property is often more profitable than residential property.
Types of Commercial Property
- Office Space
- Retail Space
- High Street Shops
- Industrial Space
- Hospitality
Investing in Commercial Property
Real Estate investment is always tricky, especially when choosing between residential and commercial property. Making this decision will take more work for someone new to real estate. Many think investing in commercial properties is only for big business people and investors. This may be true, but it is not always true.
Individuals with a modest budget can participate in commercial property investment, such as offices, shops, and showrooms. A new form of commercial property investment has emerged with virtual property or non-lockable space options. These innovative investment options allow you to invest in commercial properties without needing physical ownership or management. Essentially, you’re investing in a portion of a commercial property, and your returns are based on the property’s performance, making it a budget-friendly choice for many investors.
Average Returns in the Last Five Years
Rental returns for residential property are around 1-2%, while for commercial property, they are approximately 6-10%. Real estate returns have been consistent over the last few years, and according to market experts, they may continue to perform similarly in the next few years.
Let’s take a look at some of the advantages and disadvantages of investing in commercial properties:
Benefits of Investing in Commercial Property
Higher Rental Income
The rental return on commercial property is always higher than the residential property. In fact, in some properties, returns can be in double digits. Investing in commercial property is undoubtedly better if the property investment is made solely from earning rentals. Remember, commercial property investments are more likely to be cash-flow optimistic than their residential counterparts.
Longer Lease Period
Generally, commercial properties have a long-term lease period of three to nine years or sometimes more. You could earn rentals for a long time if you have reliable and stable long-term tenants, such as big MNCs, government departments, or well-known reputable brands. When big tenants lease any space primarily, they invest heavily in furnishing and infrastructure, so there is significantly less chance they vacant the space before the expiry of the lease agreement.
Ease in Dealing with Tenants
When investing in commercial property, most tenants are big companies, corporate houses, banks, or retail chains. Dealing with such tenants is relatively easy, and one can be assured of professional behavior and no running around to get the monthly rent.
Lease Escalations
Commercial property agreements typically include a built-in lease escalations clause, which calls for rental price increases at regular intervals, usually every three years. Over time, these escalations increase the property’s value.
Property Appreciation
Investing in commercial properties can lead to significant appreciation over a longer period than residential properties. A premium commercial property, especially if leased by a reputed bank, MNC, or big corporate house, can significantly increase the entire property’s value, offering a promising future for investors.
Regular Inflow of Income
Residential properties often have uncertainty regarding the longevity of leases or rental duration. Tenants may choose to move out after a short period, leading to potential income gaps for the property owner. In contrast, the longer lease duration of commercial property provides a more consistent and regular income, which is a significant advantage. The income from investing in commercial property is usually more consistent and regular than residential property, providing a sense of security and stability for the investor.
The Disadvantage of Investing in Commercial Property
While there are many positive reasons to invest in commercial properties over residential ones, there are still some negative issues to consider
Big Investment
Commercial properties, especially the most desirable ones, are costly and involve a heavy investment compared to residential properties. Sometimes, the cost of commercial properties is so high that the resources needed to purchase the property limit an investor’s ability to diversify their portfolio.
Choosing The Right Property
Choosing the right commercial property and location requires extensive research and market knowledge. Therefore, a retail investor may find it challenging to invest in commercial property without adequate market knowledge and expertise.
Finding a Tenant
Finding the right kind of tenant for a commercial property may be more complicated than finding a tenant for a residential property. Due to the difficulty of finding a tenant, the property can remain vacant for longer when one tenant moves out and another moves in.
Maintenance Woes
The upkeep and maintenance of a commercial property usually involve considerable expense. In contrast, the maintenance expenses of a residential property are limited to simple repairs like taps or minor electrical works, which do not require considerable costs. The renovation or maintenance of a commercial property will usually be massive.
Conclusion
Though investing in commercial real estate may seem lucrative, you must study the property carefully before purchasing it for investment purposes. If you have any queries or want the best commercial property deals, you can call me at 9811741277 or mail me at hello@vikasjoshi.in
Read: Best Commercial Projects in Delhi NCR
Frequently Asked Questions (FAQ`S)
What should I consider before investing in commercial property?
Key factors include the property location, market demand in that area, property type, and the exciting potential return on investment (ROI) and growth potential.
How can I maximize ROI on commercial property investments?
You can maximize ROI by choosing the right property type in a high-demand location with good growth potential and favorable terms that match your investment goal and budget. Follow these strategies to get the best returns on your investment.
What are the risks associated with commercial property investment?
Risks are inherent in any investment, and commercial property is no exception. Some risks associated with commercial property investment are vacancy rates, market fluctuations, tenant defaults, unexpected maintenance costs, and changes in the interest rate. Understanding and preparing for these risks is crucial to successful commercial property investment.
Why is location a crucial factor in commercial property investment?
Location is not only important but it is very critical in determining a property’s value, demand, and rental income potential. Properties in high-growth areas or near business hubs offer better returns, making location a key factor to consider when investing in commercial property.