[ecis2016.org] In this article, we discuss the pros and cons of buying commercial property, something that you should consider if you are looking at commercial property investment.
Taking investment decision in real estate is usually a difficult one, especially when it comes to choose between residential property and commercial property. For someone who is new to investing in real estate, the decision on what to choose is all the more difficult as clarity on the advantages and disadvantages of commercial property and residential property is absent. It is usually perceived that investing in commercial real estate is for big investors and businessmen. Although it may be true to some extent, it is not always the case and commercial property, especially shops and showrooms, can be invested in by even salaried people. While investing in residential property or commercial property can be a totally different ballgames, one must be very clear as to how the investment has to be made and how much involvement can the investor give after the investment is made. We take a look at pros and cons of buying commercial property.
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Pros and cons of buying commercial property
Let us understand the pros and cons of buying commercial property.
Advantages of commercial property
Higher rental income – When it comes to knowing about advantages and disadvantages of commercial property, start with comparison on what gives higher rental income. The rental yield in commercial property is higher than in residential property which acts to its advantage. In fact, rental yields from commercial property beats residential property hands down. The yield is usually in double digits from commercial property. This is the single largest advantage of investing in commercial realty estate. Sometimes, it can even be 12-14 percent if the location and condition is good. If the investment is being made solely from the point of view of earning potential through rents, then commercial property is undoubtedly better.
Ease in dealing with tenants-In the case of commercial property, one of the important pros of investing in commercial real estate is that the tenant is usually a corporate, banks, retail chains. It is relatively easy to deal with such entities and there is no running around to get the rent. If the tenant is reputed bank or corporate in one floor or one section of the property, there will be an appreciation in rental yield for the rest of the property.
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Regular Inflow of Income-The income from commercial property is usually regular and more consistent than in the case of residential property. This is one of the advantages when you compare the pros and cons of commercial real estate. Residential properties are fraught with a bit of uncertainty in terms of longevity of lease or rental duration. In case of commercial property, the rental is somewhat assured as there is longer lease duration.
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Zero furnishing cost: One of the advantages of commercial real estate investment when it comes to pros and cons of buying commercial property is that the furnishing cost is zero. This is because once you rent it to a tenant, the furnishing costs are done by them. So, as an investor, you can give your tenant a raw property. This advantage is because any company who is renting the property will have to be following their guidelines of functioning. For instance, a bank will have a particular design, while a department store will have a completely different design.
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Disadvantages of commercial property
Heavy investment: When you evaluate the pros and cons of commercial real estate, one of the biggest disadvantage is that it requires large investment. There is an involvement of a heavy amount in case of commercial property than in case of residential property. One must be prepared to invest a large amount after looking at his/her other financial needs and commitment.
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Costlier loans: The loans for commercial property are higher than for residential property, which is a big con between the pros and cons of commercial property. The interest rates and terms and conditions will also depend on the kind of property, investors’ profile, location and the tenure of repayment. But it is safe to say that the interest rates will be 100-200 basis points higher in case of commercial property. The process of availing the loan is also more complex and the lender, which may be a bank or NBFC, takes longer in sanctioning the loan.
Fewer tax incentives: There are much fewer tax incentives for an investor of a commercial property. There is no tax rebate or tax benefit on the EMI for repayment of loan for acquiring the commercial property. This is one of the biggest cons when it comes to pros and cons of commercial real estate. On the other hand, there are significant tax breaks for EMIs paid for residential property. This break brings the overall cost of acquiring a residential property down and is one of the major reason people prefer residential property.
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More road bumps in finding a tenant: One of the disadvantages when it comes to pros and cons of buying commercial property is finding the right kind of tenant for commercial property like a shop or a showroom may be slightly difficult than finding a tenant for residential property. The property may remain vacant longer when one tenant moves out and another moves in due to the difficulty in finding a tenant. The landlord must keep a certain sum aside for the EMIs (in case the property has been acquired though loan) for the intervening period of one tenant moving out and another moving in.
Maintenance woes: There is usually a larger expense in upkeep and maintenance of a commercial property, adding to the disadvantages of commercial property. In the case of a residential property, the maintenance expenses are limited to simple (tap repairs, minor electrical works, etc) fixtures and do not involve a huge cost. The maintenance or renovation in a commercial set up will usually be huge. It is also important to note that a loan for renovation can be availed at the same rate of interest as the home loan if the two loans are being taken together. However, this facility is not available in the case of commercial property.
Thorough research required: There needs to be thorough research by the investor as to what will be the overall cost in acquisition of the property, the taxes involved, the zonal laws and bylaws for renting out and the rental earning potential of that building or shop. Any mistake in any of these can prove to be really costly and this is one of the biggest disadvantages of commercial property. The development of the entire area and potential of the rental to go up in future must also be kept in mind.
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