Commercial Vs. Residential: Which Gives Better Rental Yield?

August 8, 2023
Posted in News
August 8, 2023 veps

In this debate, both have their unique advantages and risks. The decision ultimately depends on your investment goals, risk tolerance, and market understanding.

Earning a rental income is one of the most common reasons behind investing in a property. Rental income ensures that you have a steady flow of passive income, while your property investment also appreciates over time. But if earning a handsome return is your sole purpose, then you have some thinking to do too. Should you buy a residential or commercial property? Which one would give you a better return on investment (ROI)? We tell you.

Pros of investing in residential real estate
Khetsi Barot, director, The Guardians Real Estate Advisory shares,

“Residential properties tend to have more takers than commercial properties, resulting in a more consistent rental income;

Residential rentals tend to be less expensive than commercial rentals, making it easier to find tenants;
Investing in residential real estate offers the potential for tax deductions, which can reduce your overall tax burden.”

Cons of investing in residential real estate
Investing in residential property also has a flip side. Location, demand, and quality of tenant are all integral factors that will influence the rent of your house. Besides, if you cannot find a tenant by yourself, you need to hire a broker/agent who will do the job for you or you need to list the property on online platforms. This means that you will have to pay a commission. “A home must be chosen intelligently for it to become a reliable rental income earner. The buyer must be clued into the dynamics of location and demand. Without such knowledge, the property may not bring in the hoped-for rental revenue. Also, as a landlord, you are responsible for the property’s maintenance,” mentions Rahul Phondge, chief business officer, Anarock Group.

Investing in a popular area, which would fetch you a good rental income, means that you must pay a higher sum to buy the house in the first place.
Benefits of investing in commercial real estate
The biggest advantage that commercial property has over residential is that it offers a higher rental yield. Barot explains,

“Commercial real estate tends to have higher rates of return than residential properties, so investors may be able to generate higher monthly income;
Commercial rentals tend to be for a longer term, so investors can expect to have fewer turnover costs.”
Phondge further mentions that typically, the tenants of a commercial property are firms, corporations, or professional associations. Such tenants are more likely to be financially secure and responsible, reducing the risk of missed or late rent payments.
“The tenants must often shoulder their share of the operating expenses, including taxes, insurance, and maintenance,” asserts Phondge.

Drawbacks of investing in commercial real estate
Commercial real estate also has some negatives that cannot be ignored. The major hurdle is that the cost of purchasing a commercial property is much higher than a residential property. Adding maintenance costs to this, further raises the total cost.

“Success of commercial property as a rental income vehicle depends on getting the right tenants. Also, while commercial leases tend to be for longer terms, it can take longer to find a replacement tenant once the first one chooses to vacate. Renewals of leases can be complicated, and tenants may bargain for lower rent or other concessions, which could affect the rental income,” shares Phondge.

In conclusion
It is important to choose an ideal location after proper research for a better rental yield irrespective of whether it is residential or commercial. “Choose the property well. Do not look for the cheapest property, rather, focus on the right location, size, and builder’s reputation as it makes a great difference to tenants as well. Be aware of what apartment sizes are in higher demand in your chosen location and study the rental trends there over the past couple of years,” concludes Phondge.

source: timesproperty