Real estate in India is on a roll. It is expected to hit US$ 1 trillion market size by 2030 and US$ 5.8 trillion by 2047. That's about 15.5% of India's GDP!
That means an incredible phase for commercial and residential properties in India.
It also means that if you plan well, you can target high returns. And that is where many investors find themselves in a bubble over commercial and residential investments.
Let's decode what makes a better rental choice between the two and how you can plan better.
Residential or Commercial: The Better High Rentals Investment
Choosing between residential and commercial properties for high investment returns demands diligent consideration.
Residential real estate includes houses, apartments, and villas. The demand for residential properties remains consistently high, driven by population growth and changing lifestyle preferences.
Over the years, the residential segment has proven ideal for medium- and low-risk appetite investors. According to recent statistics, India's residential real estate market size is estimated to be USD 227.26 billion in 2024. Moreover, it is expected to reach USD 687.27 billion by 2029, growing at a CAGR of 24.77%.
On the other hand, commercial properties include shops, office and retail spaces, warehouses, food courts, etc. These properties yield higher returns but are also more sensitive to market fluctuations.
Commercial real estate is an excellent prospect if you intend to be someone other than the end-user for portfolio diversification. Estimates suggest that the value of India's commercial real estate market is projected to reach US$ 5.47 trillion in 2024. Further, it is expected to show an annual growth rate of 11.19%, resulting in a market volume of US$ 8.36 trillion by 2028.
Which is better- Residential or Commercial Property?
The two main elements determining whether you are better off investing in residential or commercial real estate are investment purpose and risk appetite.
Investment purpose - Residential investments are favoured for long-term consistent returns over short-term gains. They associate with a reliable income stream over the years, whereas commercial investments lean more towards wealth accumulation and short-term profits.
Risk appetite - Investing in residential property is relatively more stable. Investors with a low-risk appetite find these properties appealing. By contrast, a commercial investment offers higher returns with a higher level of risk. Investors comfortable with calculated risks find these properties a hit.
Besides these, other important factors that determine whether to invest in residential or commercial properties are:
Factor | Residential | Commercial |
Operational Costs | Residential properties have lower operating costs due to smaller scale. | Commercial properties entail higher operating costs due to larger size and business-specific requirements. |
Rental Yields | Residential properties typically yield 3-5% annually based on market value. | Commercial properties have the prospect of higher returns, ranging from 6-10%. |
Initial Investment | Generally, a lower initial investment is often required when buying a residential property. | A steeper initial investment is often required for commercial ventures. |
Tenant Availability | Securing tenants for residential properties is relatively smoother due to lower rents, creating a consistent tenant pool. | Commercial properties face challenges, given specific business requirements and higher rental expectations. |
Lease Terms | Residential leases offer more flexibility, allowing adjustments based on market conditions. | Commercial real estate leans towards stability with longer lease tenures, but this comes at the cost of limited potential for regular rent increments. |
Navigating Property Taxes
Whether you decide to invest in residential or commercial real estate, property taxes are inevitable in real estate ownership. Real estate taxation encompasses various facets, including property taxes, GST, stamp duty, and more.
Both residential and commercial properties fall under the "income from house property" category in income tax returns.
Now, let's understand the differences in taxation as per this act for these property types-
Residential Property Taxation
Residential property taxes are often based on the assessed value determined by local authorities. Importantly, this assessed value tends to be lower than the market value, easing the burden on property owners.
The income from renting a house falls under the "Income from House Property" category in the Income Tax Act 1961. The amount of tax you pay depends on the property's Gross Annual Value (GAV).
Here's an interesting fact: there's no limit to how many residential properties you can own; however, self-occupancy is capped to a maximum of two residential properties.
In other words, you can own multiple residential properties, of which you can choose two to be deemed 'self-occupied.' The rest shall be treated as rented out for taxation purposes.
Commercial Property Taxation
Commercial properties are assessed based on income potential and demand a careful approach, i.e., considering factors like property type, location, and income-generating potential.
The income from renting a commercial property will also be taxed under the 'house property' category unless your main business is renting properties.
If you're renting commercial properties and invested in them with the intention of renting them out, then the income is considered as' business income'. It will be taxed under the "Profit and Gain from Business and Profession."
Handy Tips Before You Invest
While real estate investment might get tricky, it is essential to understand and know specific tips to make the best investment.
Here are some factors to consider while making your investment-
RERA Guidelines- Consider investing in RERA-approved projects to get on-time delivery, quality construction and fair advertising and information.
Developer's Track Record- Choose a project backed by a trusted developer. Check the builder's history and credibility before investing, as it ensures transparency and matters in bank financing.
Market Research- Make sure to check the circle rate and other property rates in the same area to compare the current prices and choose the right one that fits your budget.
Additional Costs- Check on any additional costs like stamp duty, registration fees, and interest rates, as these costs affect the overall cost of the property.
Future Growth- Understand the infrastructural prospects of the region you are investing in, as it would impact your property's appreciation and resale values over the years.
Budget & Finances- Understand the financing options and budget regardless of whether you are buying a residential or commercial property.
Personal Long-Term Objective- Choose a property that aligns with your long-term goals. Invest in an under-construction property if you have a low initial investment and are not planning to shift then and there. Consider ready-to-move-in if you are willing to pay higher and want to shift immediately.
Making the Right Choice
Undoubtedly, both residential and commercial properties have different advantages and shortcomings. Nonetheless, investors can profit from the real estate market by conducting in-depth research, carefully assessing market conditions, and aligning the purpose with personal objectives.
Investors should position themselves to maximise returns in the growing real estate market by making well-informed decisions based on these factors.
While the advantages of asset ownership, high ROI, and rental income are identical to commercial and residential real estate investing, significant contrasts between the two segments need to be evaluated as per your risk appetite, anticipated returns, and time.
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