Residential or Commercial Property – Where to invest

People when buy property as an investment always face this dilemma – whether buying a residential property would be better or purchasing a commercial property would be a good idea. However the decision is not only based on the buyers' preference but on lot of other things too. Some of the factors that influence this decision include :

a) Money Involved – The cost of commercial property are usually higher than residential properties. So, if you want to earn some really good rental income on these properties, it is necessary that the commercial property is central located of a business zone. Otherwise, the only possibility is to own a small area of shop or individual office in any semi – commercial zone. On other hand, with the same amount, you can buy a better rental income fetching residential property.

b) Lease duration – The lease duration in case of commercial property is usually around for 3-5 years whereas the residential property have mostly an annual contract. The clause of annual rent increment is made a part of the contract at the time of signing it in commercial property. However, the residential properties mostly do not enjoy this flexibility. Thus, many times we see that the residential property are unoccupied for months till a buyer is ready to pay the new rent. However, it is more easier to rent a residential property versus commercial one. The simple reason being excessive demand for any kind of residential property.

c) Other costs involved- In a commercial property the rate of maintenance is higher for per unit. Also, the recently introduced property tax could also prove to be a dampener. In some cases, the tenant is asked to bear a percentage of these expenses. Also, usually tenant would well maintain the property as it is also his place of business operation. In residential property, all some to big expenses related to home appliances and furnishings are borne by owner. The tenant may or may not chip in his contribution unless specifically mentioned in contract.

d) Rental Yield – The rental yield on most of residential properties fall in the range of 3-4%. However, the yield of commercial properties can be as high as 9%. Thus, it is easier if you looking to pay off your loan on property. Although, the loan value would be only up to 60% of the asset value.

e) Economic Market- A commercial property demand surges in a economic boom. It has positive correlation with country's growth. People usually prefer starting a new territory of business with rented property to gauge the market response. However, with the slow down of market, the prices of commercial market slip further fast then residential properties. On other hand, the residential properties are always in demand although the rental yield could fluctuate.

Hence, we can summarize saying that property investment is never a standalone decision. It depends on many factors including capital available, location of property, purpose of buying a property or even the economic condition of the nation. If you are looking to simply buy a property for capital appreciation with small investment it is better to look at residential property. If you intend to buy a property with huge regular income for a longer term, with low management, it is better to look at commercial properties.