Rental income from residential or commercial property in India: What you should know?

Real estate is the most proven stream of creating strong passive income stream with possibilities of wealth creation too in the long term. But which type of property should be your pick – it is all about commercial vs residential property investment in India? We analyse the pros and cons of each.

Most people don’t realise the significant difference between commercial vs residential property investment in India and therefore, end up focussing on only one type. The leasing businesses in each type of property investment have completely different dynamics.

Rental housing as a concept evolved in India owing to the need of affordable homes. Since a tenant in a residential housing set-up requires only minimal and functional infrastructure, the operating expenses are minimal. However, when comparing commercial vs residential property investment in India, it is important to note that investment in commercial property in India entails high vacancy risks and high investment. Also, the commercial property investment in India is affected directly by the dynamics of the real estate cycles and the economy. But in the case of residential properties, they are not related with the market with huge shortage and being highly user-driven.

  • With high investment, commercial property in India are costlier compared to residential ones, unless investment is in individual shops.
  • Compared to residential spaces, commercial rental yield in India is higher and with longer lease periods.
  • While in the case of residential spaces, the onus of repairs and maintenance falls on the landlord, the tenant is generally responsible when it comes to commercial properties.

 

Despite being complicated in terms of legal matters, commercial properties get higher yields and have longer lease periods. However, unlike commercial properties, the rental value doesn’t fall in the case of residential properties when the market is slow. Depending on the location and quality of the property, rental yields can be anywhere between six to 10 per cent for commercial property investment in India. But capital appreciation is limited. For medium to long-term investments, the commercial property investment segment is being preferred.

While for a new investor, residential practices are far easier to understand, commercial property practices are much complicated though it can fetch more income. By investing in a property worth Rs 4-5 crore at a prime location, Rs 40 lakh can be expected as annual income.

Even if the rental returns on commercial properties are seen to be higher vs residential properties, it is important to take note of factors such as location, prevailing market conditions, procurement price and the correct property selection.

It is important to take note of pointers like availability of tax benefits for residential properties as compared to location-specific income from tenants on commercial properties. Whereas residential property is a life-long asset which can be passed on to the next generation, rental value of the commercial spaces increases with capital appreciation over time.

Cash flows may be affected by vacancy in commercial spaces and the investor needs to take regular risks for higher amount of capital. In residential spaces, the cons include high maintenance and delay in possession of the property.