Real estate investment is considered one of the most profitable investment opportunities, and commercial real estate is no exception. While commercial property is typically associated with wealthy individuals and corporations, it is also possible for salaried individuals to invest in commercial properties, such as shops and showrooms.
Commercial real estate is an attractive investment class because of its potential for consistent returns, higher rental value, and passive income. It offers tremendous growth potential and a steady cash flow through rentals, making it an increasingly popular option for investors. In this article, we will examine the pros and cons of investing in commercial properties.
Pros of Investing in Commercial Real Estate:
1. High Rental Income
Commercial properties typically offer higher rental yields than residential properties, making them an excellent investment option. The average rental yield for commercial properties ranges from 8-12%, while residential properties typically offer an average rental yield of 1-3%. This means that commercial properties have the potential to generate significantly more income than residential properties.
2. No Furnishing Costs
Investing in commercial properties requires no furnishing costs, as tenants are responsible for these costs once the property is rented. As an investor, you can provide your tenants with raw property, and any company renting the property will be required to adhere to their operational guidelines. This benefit is due to the nature of commercial real estate, where tenants generally have a specific vision and design for the space they occupy.
3. Ease in Dealing with Tenants
Commercial real estate tenants are typically well-established companies, which makes dealing with them much easier. Corporate tenants are reliable and rarely require chasing down for rent payments. Additionally, if a reputable bank or corporate tenant occupies a section of the property, the rental yield for the rest of the property may increase.
4. Long-Term Commitments
Commercial properties are typically leased for 10 to 20 years, with an option for renewal. Lease agreements also include a provision for yearly rental value appreciation, allowing commercial property owners to expect regular and consistent returns.
Cons of Investing in Commercial Real Estate
1. High Investment
Commercial properties usually require a significant investment. A larger sum is required than in the case of residential properties, and investors must be prepared to invest a significant amount after considering their other financial needs and commitments. Minimum investments in commercial real estate are typically out of reach for the average retail investor.
2. Costlier Loans
Commercial property loans are more expensive than residential property loans, which can be a significant disadvantage. The interest rate, terms, and conditions will also be determined by the type of property, the investor’s profile, the location, and the repayment period.
3. Complex Asset Management
Finding the right tenant for commercial property can be slightly more difficult than finding a tenant for residential property. Commercial property tenants are typically corporates and require smooth end-to-end asset management. Retail investors often lack professional expertise in managing complex commercial assets.
4. Thorough Research Required
Investors must conduct extensive research into the overall cost of acquiring the property, the taxes involved, the zonal laws and bylaws for renting out, and the rental earning potential of the building or shop. Due diligence and market knowledge are necessary to find the right property and geographic location. Individual investors may find it challenging to invest in commercial properties due to a lack of market knowledge and other resources.
5. Tax Implications
Commercial property investment through fractional ownership is still in its early stages, and there are no specific regulations for this asset class. According to current income tax regulations, income from subletting commercial property will be taxed under the heading ‘income from other sources’ if you do not own the property. If you run a business centre on your property while also providing other services, the income can be treated as business income as long as the different services and renting out the space account for a significant portion of the total. Except in these circumstances, all of the income you get related to the property you own will be taxed under the head explicitly designated for property income, regardless of the name given to the revenue. There are just a few legal deductions that can be made against rental income because the revenue from renting out such property is taxed under the heading “income from house property.” It is best to avoid listing your actual rental income under “earnings and gains of business or profession” in order to deduct other costs.
In conclusion, commercial real estate can be a lucrative investment option for those willing to take on the higher upfront costs, greater risks, and more complex legal and regulatory requirements. However, it is important to conduct thorough due diligence and research to ensure that the investment aligns with one’s financial goals and risk tolerance.