">">">"> Pros and Cons Of Investing in Commercial Real Estate
Pros and Cons Of Investing in Commercial Real Estate

Pros and Cons Of Investing in Commercial Real Estate

Investing ones hard earned money in real estate is a task to consider when one has to invest in Commercial or Residential property. Hence, an individual seeking to invest has to dig deeper as authentic knowledge about the pros and cons of investment is available but to a limited extent. There has always been a myth that investing in commercial real estate is only for the rich folks having bundles of money. But, in retrospect it's not true, as even salaried folks can invest in it. Rajasthan-based property developer Trehan Home Developers Private Limited (THD) has recently invested around Rs 35 crore for a shopping mall called "Urban Square Galleria" in the state's Alwar city. One floor of the mall has been named "Janpath." Hence, One must weigh the pros and cons of investing in commercial and residential properties and make a mindful decision. Here are some pros and cons of such an investment:

Advantages of commercial property:

1.Higher rental income – this is the best way to make an investment decision. How much return the property gives is directly proportional to how many individuals invest in it. Commercial property comes up with a higher yield return than a residential one. Residential property can provide you a return of 1.5-2.5%, but in commercial property, the recovery can go upto 12-14%. One can start a side business with the interest earned with an investment in commercial property.

2.Ease in dealing with tenants – the tenant is usually an experienced one like a bank, corporate, or retail chain when it comes to an investment in commercial property. Dealing with such entities has a lot less hustle and bustle than dealing with the ones occupying the residential property. In residential ones, periodic calls for rent collection are present. If the tenant happens to be corporate in one section, the entire section is expected to undergo an appreciation.

3.The regular inflow of income – commercial property comes with a steady flow of revenue, unlike residential one. Residential properties are fraught with a bit of uncertainty in terms of the longevity of the lease or rental duration. In the case of commercial property, the rental is somewhat assured as there is a longer lease duration.

4.Zero furnishing cost: The furnishing cost is zero regarding the pros of investing in commercial property. The maintenance and furnishing cost in commercial property lies with the tenant. As an investor, one can give a tenant raw property. This advantage is because any company renting the property will have to follow its guidelines of functioning. For instance, a bank will have a particular design, while a department store will have a completely different design.

Disadvantages of commercial property –

1.Heavy investment – Investing in commercial real estate comes with considerable capital investment. Compared to residential property, investment in commercial property involves a huge amount. One must be prepared to invest a large amount after looking at his/ her other financial needs and commitment.

2.Costlier loans – the loans in the case of commercial property are higher and bigger, and the rate of interest also depends upon the type of property and location of investment. Hence, making commercial property investment a heavier and bulkier one. The interest rate is 100-200 % basis point higher in the case of commercial property. The process to avail the loan is more complex, and the lender, who may be a bank or NBFC, takes longer to sanction the loan.

3.Fewer tax incentives: There are much fewer tax incentives for an investor of a commercial property. There is no tax rebate or tax benefit on the EMI for repayment of the loan for acquiring the commercial property. This is one of the biggest cons when it comes to the pros and cons of commercial real estate. On the other hand, there are significant tax breaks for EMIs paid for residential property. This break brings the overall cost of acquiring a residential property down and is one of the major reasons people prefer residential property.

4.There are more road bumps in finding a tenant – finding the right kind of tenant can be difficult regarding the cons of making an investment in commercial real estate like shops and offices than I residential property. Chances of the property remaining ideal when one tenant moves out and the other moving in can be higher due to difficulty in finding a tenant.

5.Maintenance woes – the higher maintenance cost can be a consequence of investing in commercial property. Maintenance of a residential property doesn't involve that much higher charge. Commercial setup calls for huge maintenance and renovation setup. It is also important to note that a loan for renovation can be availed at the same rate of interest as the home loan if the two loans are being taken together. However, this facility is not available in the case of commercial property.

6.Thorough research required – There needs to be thorough research by the investor as to what will be the overall cost in the acquisition of the property, the taxes involved, the zonal laws and bylaws for renting out, and the rental earning potential of that building or shop. Any mistake in any of these can prove to be really costly, and this is one of the biggest disadvantages of commercial property. The development of the entire area and the potential of the rental to go up in the future must also be kept in mind.

What To Keep In Mind?

Investors must study all the aspects, such as the property cost, taxation, local zoning laws, by laws for renting properties, and the shop's rental earning potential before investing. Any lapses in any of these aspects could prove costly.