Investment in residential property acts as a potent wealth
preserver. Before making a choice between residential and commercial property,
you need to consider factors like your financial conditions, expectations,
investment plan, and you will have to decide which one is more profitable
investment. A number of compelling reasons underpin investment in residential
property as a profitable investment. But, if you have means, commercial
property can turn out as bumper crop for you. Most investment portfolio holds
traditional residential property as sound investment, but diversifying your
portfolio can yield you better return.
So, if you want to earn a robust return on investments, you should
consider investing in real estate.
Definition
Let’s begin with some terminology.
Residential Property-
Residential Property draws income from dwelling units. Single family homes,
apartments, buildings, etc fall under the category residential property.
Commercial Property-
Commercial Property draws income from non residential avenues like retail
space, offices and tenants.
Types of Property for Residential and Commercial
Investments
Generally houses of 4 units or less is considered as
residential property. It derives income in following ways
·
Buy to Let- You
can purchase buy to let investment properties that mean you’ll get rental
yields every month.
·
Resell- You can purchase
property solely for resale purposes.
Commercial Property-
Commercial Property derives income from business, like from hotel, restaurants,
warehouse, and industrial buildings.
Residential Property is considered as more favorable
investment because managing a residential property is much simpler than
managing a commercial property. Hence, investors often rely on investment in
residential property as a safe haven because you don’t need any professional
real estate company to support you.
The Pros and Cons
The escalating cost of a property has not been able to dampen
the spirit of property lovers. Before buying the property, make sure you
understand pros and cons of the same.
Residential Pros
·
Residential Property is easy to rent. Also, the
yield is high, so there are lots of potential tenants.
·
Leases are generally for stipulated time frame.
So, turnover tends to be strong if you invest in multiunit residential
property.
·
It is one of the few financial assets where
financing tends to be easier and straightforward.
·
The cost per unit tends to be lower in
residential property in contrast with the commercial one.
·
It adds beneficial effect on expected returns.
Investing in residential property help you to manage risk more effectively by
protecting against market cycles or consequential negative events, often known
as tail risks.
·
Moreover, you can keep a watch on your property
by residing in the property.
·
Residential property market does not require
extensive knowledge of property market and current conditions, all it requires
is a simple research.
Residential Cons
·
It requires a lot of management.
·
If you are investing in buy to let option, then
if a tenant vacates the home, it equals to 100 percent loss of rent.
·
If you are planning to rent your multi family
house, it tends to be older; hence it requires more maintaince on your part.
·
Demand for residential property have shown
sustained growth but the major disadvantage of letting your property is you can
get a call or complaint anytime.
·
If you have an ancestral house or large multi
unit residential property, it requires more repair and maintaince.
Nonetheless, Investing in residential property is regarded
as low risk investments. If you plan to invest in commercial property, you need
to have an extensive knowledge of real estate market and current economic
conditions affecting the globe. You need to value the property accurately and
need professional real estate management company to assist you.
Commercial Pros
·
Leases are for longer duration, say it can be of
5 to 10 years. Except for a small business no reputed company can take risk of
becoming an established company in a particular area without any guarantee.
·
The other advantage is tenant share expenses on
pro rata basis, which means tenant is liable to pay a particular amount of
expenses and maintaince costs. This makes cash flow more predictable.
·
Another benefit, it requires less hands on
management as compared to residential property. It rarely requires renewal or
repair and maintaince on your part. Generally, there is a contract between
tenant and landlord that tenant will be responsible for repairs, maintaince,
and glass breakage, if any.
·
They have a high potential of returns. Although
they are considered as risky, yet the yield is high. Moreover, businesses are
considered as more reliable than private arrangements.
The major disadvantage of investing in commercial property
is unable to find commercial tenant.
Commercial Cons
·
Despite its flexibility, lenders are not willing
to finance you unless and until you have relative experience in the same field.
The financing option is not easy and straightforward.
·
Leasing a residential property is much easier as
compared to leasing a commercial property because it involves a lot of legal
procedures like attorneys of both the sides will try to negotiate and decide on
terms and conditions of the lease. The cost involved in the legal procedure is
exorbitant.
·
Extensive knowledge acts as hedge against all
the problems. If you are investing in commercial property, you need to
understand concepts like tenant mix, and if you are investing in retail space,
you need to understand the basic concepts like commercial insurance and
reconciliation of expenses, etc.
·
The process of resale is quite complicated.
·
Last but not the least, as said earlier it is
not easy to find potential commercial clients. Commercial clients usually allow
6 to 12 months to renew the lease. Hence, tenant gets ample time to find a new
landlord.
There are many factors that you need to consider before
purchasing any investment but remember diversifying your portfolio can offer
added protection and income. With the ravages of time, residential property has
become a more profitable venture for conservative investors. By considering
your objectives and by evaluating your financial resources- you can jumpstart
with the most favorable option.
