Commercial vs Residential - Which Is a Better Source For Rental Income?

Purchasing a commercial or residential property can have two primary reasons, investment for ready possession or living space that should appreciate over the years or offer a second line of income in the form of rent. Different factors can contribute to getting these decisions right for achieving the desired objectives. Therefore, it is important to be able to weigh these investment options to make a well-informed decision. Here is a detailed difference between commercial and residential properties that can impact rental income.

Commercial vs Residential

Features	Commercial	Residential
Type of properties	Shops, restaurants, warehouses, office spaces, etc.	Apartments, houses, villas, etc.
Type of investors	High-risk appetite investors	Medium and Low-risk appetite investors
Initial cost	High	Comparatively low
Relationship with tenant	Formal relation between the owner and the tenant due to the nature of the agreement	There exists a private and closer relationship between the owner and the tenant.
Operating costs	Higher in comparison due to the extensive amenities that need to be provided for the tenant.	Minimal infrastructure and utilities are required for affordable housing.
Lease tenure	Longer and can be a few years.	Shorter and can be for a few months.
Finding tenants	Difficult.	Simpler.
Resale process	Tedious .	Hassle-free.
Rental income	Higher.	Lesser.

Having discussed the difference between residential and commercial properties in aspects concerning rental income, here are the important factors to consider before making a decision.

Factors To Consider

• Tenant availability

  Tenant availability is crucial to ensuring consistent rental income. The demand for residential properties for rental purposes is higher in Tier-1 and Tier-2 cities. Therefore, the tenants available for residential properties are more in number than for commercial properties. Moreover, it is easier to find a client for residential properties than commercial ones considering the increased availability. However, if tenants are found for commercial properties, the owners can ensure consistent rental yield over the entire lease tenure.

• Location and Initial Investment

  Location is an important factor that determines the rental income for both residential and commercial properties. The initial investment cost is comparatively low for residential investment. The owners need to provide the basic infrastructure for affordable housing facilities and other utilities for electricity, water, etc. On the other hand, the initial investment and the operational costs for commercial real estate investment are higher. For instance, a person renting out a space for a shopping complex or a mall must consider the various amenities for public usage and comfort levels at a large scale. However, providing these facilities best can help increase the rental income for higher returns.

• Lease tenure and legal process

  The lease tenure is generally 11 months for residential properties, and the renewal process is relatively simple. On the other hand, the lease tenure is longer and can extend up to 10 years for a commercial property investment. And the agreement can have different considerations and clauses specific to the operating conditions that can make the legal procedures tedious. Also, defaults of tenants can pose a higher risk considering the long-term agreement and higher initial investment in commercial properties.

• Maintenance

  After the property is rented out in residential properties, generally, the owner is responsible for maintaining the property and bearing the repair costs. On the other hand, in a commercial property usually the tenants take the responsibility to manage the property and maintain it to the best standards to profit from their businesses. It is undoubtedly an advantage for the owner.

• Rental yield

  The rental yield for residential properties on an annual basis is comparatively lesser than for commercial properties. However, as the lease tenure is shorter in residential properties, there can be an increase in the rental income every year during the renewal considering the developments surrounding the region. On the other hand, as the lease tenure is generally longer for commercial property investment, there may not be an increase in the annual rental income for the entire duration, even if there is an increase in the property value. However, it is advantageous for one major reason. If the rental income is higher, there is a certainty of a steady flow of income for the entire period for commercial properties.

Residential vs Commercial Property: Which Is Better?

For a person with a higher risk appetite and who can invest enormous funds to develop a commercial property in a supreme location and find tenants for consistent income for the longer lease tenure, commercial properties can be a better source of rental income. On the other hand, for a person with a medium or low-risk appetite, cannot get into a more extended lease agreement, cannot invest in extensive funds, and wants a consistent increase in rental income annually, residential properties can be a better source of rental income.

Conclusion

The decision to invest in residential or commercial real estate properties for better rental income will be based on individual risk profiles, financial objectives, and other factors such as tenant availability, location, lease tenure, initial investment, etc. Therefore, it is important to consider these factors over the long term to make a well-informed decision. Piramal Aranya is envisioned to offer apartments for people who seek luxury, comfort, and true exclusivity at its best in the neighbourhood of Byculla, Mumbai.

Disclaimer- This article is based on the information publicly available for general use as well as reference links mentioned herein. We do not claim any responsibility regarding the genuineness of the same. The information provided herein does not, and is not intended to, constitute legal advice; instead, it is for general informational purposes only. We expressly disclaim /disown any liability, which may arise due to any decision taken by any person/s basis the article hereof. Readers should obtain separate advice with respect to any particular information provided herein