Commercial Vs. Residential Real Estate: What Should An Investor Know About Rental Income

Rental income is a significant aspect for anyone looking to invest in real estate. The issue is, which sort of rental revenue is better for producing rental income— residential or commercial? Can you make both commercial and residential real estate investments? Property purchasers are often perplexed whether an investment in residential or commercial property will give a better rental income alternative. 

Investors see real estate or property investing as the safest investment alternatives accessible, alongside fixed deposits, gold, mutual funds, and PPF. Real estate is still the most trusted investment option since it is one of the few physical ones available. Also, the opportunity cost of real estate investing is favorable, and real estate is a less volatile tangible asset type than stocks. Despite a heavy toll from causes, the real estate segment, particularly the residential realty segment, has weathered the test of time and is an appropriate investment class for investors with medium and low-risk appetites.

However, when they state that land is the finest investment opportunity on the planet, they neglect to identify the type. Commercial or residential? It is the million-dollar question that a property owner asks before investing his hard-earned money in real estate to make a rental income. Over lengthy periods, commercial properties may provide high rental income. For example, Assetmonk is a platform that offers commercial real estate investing in Bangalore, Chennai, and Hyderabad and IRRs ranging from 14 to 21%. These commercial properties also generate high rental income. However, one may also generate rental income by leasing residential property. Both residential and commercial property investments have their advantages and disadvantages. Let us go through this in further detail. 

Firstly, What is the Difference Between Commercial and Residential Property?

Many frequently do not understand the distinction between residential and commercial properties when making an investment and, as a result, tend to focus on only one type. However, one must understand the distinction to make the best out of it for rental income. 

Commercial real estate is an umbrella word for significant market segments such as retail, office, and industrial assets. Apartments, childcare facilities, condos, movie theatres, parking lots, industrial floors, warehouses, and retail spaces held by companies such as Big Bazaar, Croma, and others are among the assets in this category. In a nutshell, commercial real estate is any property explicitly used for business purposes (CRE). 

Residential real estate includes housing typically rented rather than owned by the owner. That may appear overly simplistic, but it is the same. Residential real estate refers to any property built purely for dwelling (RRE). 

However, the primary distinction between RRE and CRE is the way they get leased and the laws involved. Because those features change, the aspect of investing in one of them differs as well, although the essential idea stays the same. 

Secondly, What is Rental Income?

Rental income is any earned income derived from a rental property that you own or have access to. So, a landlord derives the rental income from his tenants. The leasing of houses, flats, rooms, office space and other immovable property are all examples of sources of rental income. But there is a lot more to it than just that. Rental income includes not just payments for the rented space. But, also charges for the usage of any furniture and prices for any additional services. Cleaning, hot water, heating, and property repairs are such services.

The investors invest in residential buildings and gain rental income from them. This trend gets driven by some variables, including quicker residential property purchase or development, fewer permissions, faster clearances, a smaller initial investment, and easier resale. However, when we look at historical ROI, we can see that rental income from residential buildings is significantly lower than commercial properties. Rental income from residential properties and commercial property may get expected to be around 2% per year and exceed 8% per year.

But is Rental Income Taxable in India?

Yes, rental income is considered any other income in India and is subject to taxation. It gets taxed under Section 24 of the Income Tax Law. If the amount received as rental revenue exceeds Rs. 2,50,000 per year, the property owner must pay rental income tax. According to the country’s current income tax legislation, the owner can claim a standard deduction of 30% on rental income obtained through a property. Also, the government makes no distinction between residential and commercial property in India. Thus, there is no difference between residential and commercial property tax.

Which One is Better for Rental Income: Residential V’s Non-Residential Property?

One of the most significant advantages of investing in real estate is a substantial rental income. However, is residential or commercial rental income more helpful? These factors below are critical in determining the rental income of residential and commercial buildings. 

● Tenants: Checking the availability of renters is one of the first stages in deciding between a residential and commercial rental income. Rental housing demand in Tier-1 and Tier-2 cities is skyrocketing because of rising industrialization and urbanization. People are relocating from various places for better career chances and educational options. No doubt, it is simpler to find a renter pool for residential homes here. But when renting out commercial premises, the renter pool is far smaller. 

●     Location: Location is a critical aspect in generating rental income, whether it is a residential property or commercial property. Commercial properties might expect a high rental income in an area with fewer than 5% vacancies. Supply is scarce in this scenario of low vacancy, and therefore renters are less inclined to leave. The property owner has a better chance of receiving a higher rental income. If the site has a high percentage of vacancies, the tenants will relocate and negotiate rents. In the case of residential properties, however, rental income is determined by proximity to educational institutions, hospitals, shopping malls, restaurants, and other facilities. If you rent out a luxury neighborhood property, your rental income will be high.

●     Costs of operation: The expenditures of the initial functional setup also play a significant effect in determining your property’s rental income. If you rent out a residential home, you need to offer the bare necessities. Electricity, water, and sewage are examples of basic amenities. Commercial properties, on the other hand, have more operating expenses. Aside from the fundamental necessities, the proprietor must obtain the required rights and clearances to run a business in that specific location. For example, It will necessitate a complex infrastructure plus more money if you rent your property to a mall.

●     Tenure of Lease: The lease duration of any property has a significant impact on its rental income. Residential property leases have shorter leases than commercial building leases. Most commercial property leases last between 3 and 20 years, but residential buildings only get leased for a few months. In addition, when it comes to expanding the duration of the lease tenure, the owner of a commercial enterprise has an advantage over the owner of a residential property. In general, the provisions in commercial leases are not easy, making it more difficult for renters to disobey the restrictions. 

Now, What are the Best Rental Income Properties in India for you?

If you wish to enhance your rental income, the following tips can help you make wise rental investment decisions:

● Co-living housing: The untapped demand for co-living homes in India is massive. It is composed of students and migrant working professionals between 18 and 35. Millennials account for more than 30% of India’s population, so if you’re thinking about where to invest in real estate, investing in co-living homes gives both demand and rental income growth opportunities.

● Rental housing: The need for rental housing is more in the country’s low-income demographics. Rental accommodation is the only choice for daily wage earners and migratory employees from the informal economy. Government report estimates that between 26 and 37 million households in metropolitan India live in informal housing. As a result, investment in India’s low-cost housing market delivers a greater rate of rental income.

● Airbnb: You can also invest in Airbnb rental properties like a cabin in the countryside or a big 6-bedroom home in the metropolis for rental income. These properties have grown in popularity in recent years. One main benefit of investing in Airbnb properties is a higher rent per night. If you have a home that gets rented for the majority of the month, you may make significantly more money than if you only have one renter.

● Fractional Ownership of CRE: Fractional ownership divides the cost of a commercial property into numerous sections, allowing individual investors to own a stake in it. Fractional ownership is a popular investment option in India, and the mix of rental income and capital appreciation makes it an excellent investment option.