Source : INDIA TODAY NEWS
With the festive season bringing property purchases into focus, investors looking to put money into real estate face an important question: should they buy a residential property for rental income and potential appreciation, or consider commercial real estate for higher rental returns?
The answer depends on more than just the type of property. Rental yields, the cost of borrowing, tenant demand, maintenance expenses and the time a property may remain vacant can all determine how much an investor actually earns.
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Commercial property can offer higher rental returns than residential real estate, but the additional income potential comes with risks that investors need to assess before making a decision.
COMMERCIAL PROPERTY OFFERS HIGHER RENTAL POTENTIAL
Residential properties generally offer lower rental yields, while commercial assets, particularly professionally managed office properties, can generate higher returns. According to K Madhuram Reddy, managing director of Gangothri Infraedge, residential property typically offers rental yields of around 2.5%, while office properties may offer yields of 7–8%.
However, these figures should not be treated as the actual profit an investor will earn. Expenses such as maintenance, property taxes, management charges and borrowing costs can reduce the returns, while periods without a tenant can further affect income.
The distinction is important for investors comparing properties on the basis of advertised rental yields. A property promising higher rent may not necessarily deliver better returns once all costs are accounted for.
Investors also need to consider how reliably the rental income will come in. Alok Banerjee, whole-time director and CEO, said the purpose of the investment should guide the choice between residential and commercial property.
“Residential property is relatively easier to rent out because the tenant base is wider, whereas finding the right tenant for a commercial property can take time,” Banerjee said.
“Commercial assets can offer better rental returns, particularly when professionally managed, but the location, tenant profile and lease structure matter,” he added.
For investors, therefore, the decision is not simply about choosing the property with the highest potential yield. The consistency of rental income and the likelihood of keeping the property occupied are equally important.
RISING BORROWING COSTS COULD AFFECT RETURNS
The cost of financing is another factor investors need to consider, particularly after the Reserve Bank of India raised the repo rate by 25 basis points to 5.5%.
A higher policy rate can translate into increased borrowing costs for borrowers when banks and housing finance institutions pass on the change. For investors purchasing property with a loan, this could mean higher equated monthly instalments (EMIs) or a longer repayment period, depending on the loan terms.
Banerjee said higher borrowing costs could reduce the cash flow available to property investors, especially when rental income is insufficient to cover financing and other property-related expenses.
This makes it important to assess the relationship between rental income and the total cost of owning a property before taking on debt. A higher rental yield may look attractive on paper, but the investment could generate limited cash flow if a significant part of the income goes towards loan repayments and upkeep.
Investors should also account for the possibility of vacancies, particularly in commercial property, where finding a suitable tenant can take time.
LOCATION AND TENANT DEMAND MATTER
The choice between residential and commercial property also depends on the city and the specific locality in which the property is located. Madhuram Reddy said investors should examine employment growth, infrastructure connectivity, tenant demand and the price at which they enter the market.
He pointed to the north-western corridor of Hyderabad as an example of a market that has benefited from the concentration of information technology campuses, global capability centres and corporate offices.
However, Reddy cautioned against choosing a city based only on its potential for property price appreciation.
“The real opportunity lies in buying at a sensible valuation where rental demand can sustain future growth,” he said.
This means investors need to evaluate the demand that supports a property’s rental income, rather than relying solely on expectations of prices rising. A well-connected location with a strong tenant base may offer a more sustainable investment case than a property bought at a high valuation on the expectation of future appreciation.
WHAT SHOULD INVESTORS WITH RS 1 CRORE CONSIDER?
For someone with Rs 1 crore to invest, the decision should begin with the investment objective: regular rental income, long-term appreciation or a combination of both.
Residential property can appeal to investors seeking a wider pool of potential tenants and a relatively straightforward rental market. However, the rental yield may be lower.
Commercial property may offer greater income potential, particularly when it is professionally managed and has a suitable tenant. But investors must carefully assess the lease structure, tenant profile, vacancy risk and expenses before committing their money.
Reddy said he would focus on the asset’s ability to generate sustainable income rather than choosing solely on the basis of whether it is residential or commercial.
“A residential property has a fairly diverse group of tenants and may be more easily leased, but returns are likely to be fairly low,” he said. “With a commercial property, one could get more in terms of income potential via professionally managed property, yet again the risks involved should be thoroughly examined.”
Ultimately, the better investment will depend on the purchase price, rental demand, financing arrangements and the investor’s ability to manage the risks.
During the festive season, when property buying may be on the radar of many investors, comparing the income an asset can realistically generate with the costs of owning it is more useful than choosing on the basis of rental yield alone.
(Disclaimer: The views, opinions, recommendations, and suggestions expressed by experts/brokerages in this article are their own and do not reflect the views of the India Today Group. It is advisable to consult a qualified broker or financial advisor before making any actual investment or trading choices.)
– Ends
SOURCE :- TIMES OF INDIA
