Rental Income if you are planning to invest in property to earn returns, which type of property should you choose – residential or commercial? We analyze the benefits and drawbacks of each
Rental income is an important consideration, for people who want to invest in the real estate sector. Property buyers are often confused over which would provide better income option – an investment in a residential property or a commercial one and looking for information
Rental Income : Risk versus rewards between commercial and residential properties
- Tax benefits: Commercial and residential properties that are let out, attract tax on income from house property. However, a house property that is taken on a home loan, qualifies for tax breaks under Section 24 and Section 80C of Income-Tax Act.
- Risk and volatility: This is perceived to be higher in a residential property, due to frequent change in tenants, higher maintenance and upkeep costs and lower returns. Commercial properties offer stable, long-term rentals, with predictable income streams.
- Entering and exiting an investment: Both are illiquid assets. However, with Real Estate Investment Trust (REIT) regulations, it would be easier to create a portfolio of commercial properties than residential properties. Also, since the supply of Grade A pre-leased assets is low, the demand is much higher, making it more liquid than residential properties.
Rental Income: Benefits and drawbacks of investing in residential property
| Benefits | Drawbacks |
| Lower entry ticket | Low rental yields / rental incomes |
| No minimum / lowest size applicable | Investment in interiors, etc., to make it rent-friendly |
| Loan facilities easily available | Rental agreement usually cannot exceed 36 months |
| Leasing process is usually easier | |
| Comparatively lower holding period for returns, as against commercial property |
Benefits and drawbacks of investing in commercial property
| Benefits | Drawbacks |
| Higher rental yield and returns | The capital values of commercial properties tend to remain stable for longer periods of time |
| Longer term lease possible, i.e., up to nine years | The property may need to be of a specific minimum size, to be commercially viable |
| Leasing can be in bare shell or warm shell | Difficult to offload, as there are fewer buyers in the market |
| Commercial values are not very volatile |
