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Rental Income From Residential V/S Commercial Real Estate

June 22 2018

Rental Income From Residential V/S Commercial Real Estate

Real estate investment is one of the most stable and lucrative forms of financial investment in India. One of the best ways to earn a passive income is by investing in real estate. However, first-time investors are often unsure of whether to invest in residential or commercial real estate, especially in the context of rental income. As a blanket statement, it is safe to say that commercial real estate offers a significantly higher rental yield than its residential counterpart. Having said that, it is important to take into consideration the prevailing market conditions, the location, size and layout of the property, the builder’s reputation and the procurement price of the property before making an investment.

Here’s a quick overview comparing the rental income from residential and commercial real estate.

Overview of investing in residential real estate

  • Steady source of rental income with marginal increase every year
  • Uncorrelated and mostly unaffected by prevailing market conditions
  • Lower investment cost
  • Availability of tax benefits
  • Flexibility to use property for various purposes
  • Shorter lease periods
  • High risk of delay in possession
  • Responsibility and costs of all repairs and maintenance

Overview of investing in commercial real estate

  • Source of regular and sizeable rental income
  • Very high rental yield, depending on certain factors
  • Longer lease periods
  • Higher investment cost
  • Rental value increases with capital appreciation

Rental income comparison between residential and commercial real estate

The rental yield on residential properties is not very attractive when it comes to ready-to-occupy homes in India. However, if an investor is looking at large scale investment made at an early stage, then the rentals could be comparable to those of a commercial property.

On the other hand, commercial property investment in India fetches somewhere between 6-10 per cent rental yield, depending on the quality of construction, location of the property and market conditions. This could translate into something like an annual rental income of Rs. 40 lakhs on a well-located commercial property worth Rs. 4-5 crores.

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