People often do not realise the difference between residential and commercial properties, while making an investment for renting property in India. The leasing businesses in the residential property and commercial property have entirely different dynamics. Rental housing emerged as a concept in India, to provide to the severe housing shortage of affordable houses. The operating costs of rental housing properties are minimum, as the tenant only requires essential, yet functional infrastructure.

However, commercial property investments (i.e., offices and malls) typically require high investment and come with leasing and vacancy risks. Moreover, there’s a direct impact on the Indian economy and real estate market cycles on this segment. This is unlike residential housing, which is uncorrelated with markets, as it is end-user driven and there exists a huge shortage.

Rental Income: Commercial or Residential Property

• Commercial properties are always expensive as compared to residential except you are investing in individual shops.
• Commercial properties have more extended lease time periods and higher rental value, as compared to residential projects.
• For repairs and maintenance, the tenant is usually responsible for it in commercial properties, while it is totally the landlord’s responsibility in the case of residential properties.

Which is more attractive for rental income?

In terms of legal aspects, commercial properties are more complicated, they have longer leased periods and can provide you with the higher rental amount if you get a big deal for a longer period of time. The rental cost of a residential property does not go down if the market is slow, unlike commercial properties. However, one should be well-versed in how the commercial property market works, before entering into it.

Experts believe that commercial property investments can get anywhere between 6%-10% rental yield, depending on the quality and location of the property. However, capital appreciation is limited. Many institutional funds are concentrating on commercial property, for medium to long-term investments.

In India, return on housing rentals, when managed by individuals, are not attractive on ready-to-occupy properties. However, if we inspect rental housing on a large scale, with institutional or large property investors who enter at an initial stage, it is likely to yield higher returns related to commercial properties.

Residential properties are less complicated and simpler to understand for a new investor. One can determine its value through comparisons, while this may not be so simple in the commercial segment. However, the commercial section can fetch excellent income. You can expect at least Rs 40 lakh as yearly income, by investing in a property worth Rs 4 to 5 crores in a prime location.

However, the rental returns from commercial property are usually higher in comparison to a residential property. Property buyers should remember that it is ruled by various factors, such as the right selection of property, location, procurement price, current market conditions, etc.

Residential vs commercial properties: Benefits and drawbacks