Compared to the Western world where Retail participation in Equities is 50% or more, merely 5-6% of Indians invest in stocks in any form, directly / indirectly. The main investment stays in Real Estate. With Indian mindset it is quite pertinent to understand as to where one should put her money, if it is going to be in Real Estate.
If one goes by the papers, wherein most Real Estate deals are done in part Cheque & part cash, the returns seem great. However, in actual terms, Investment in Residential Property generally is giving a losing return, as it does not even meet the Inflation, after deducting the Maintenance & Taxes.
In case of NCR, generally a 1 Cr flat would give a monthly rental of Rs 20000/ to 25000/. Similarly, a 2 Cr floor could fetch somewhere near Rs 50000/ pm. Hence, on 1 Cr investment, annually one would get 2.5 Lakh, ie, 2.5%. If you deduct taxes, it would be close to 2 lakh or 2 %. If you further reduce the maintenance cost eg whitewashing etc, when Tenants change, it would further come down. However, in case of Commercial properties, normally tenants stay for protracted periods. They themselves take care of upkeep and beautification of the property, as it directly affects their businesses.
Why Invest in Commercial Real Estate?
As a thumb rule, a Residential property gives 1-2% annualised return whereas a commercial property’s return is in the range of 5-8%. The Catch however is that the Selection of the Commercial property should be done wisely & with due diligence, as a wrong choice like inappropriate location etc may lead the property to remain without tenant, leading to revenue loss apart from payment of maintenance charges. A Pre-rented property with Bigger names, even if at a lesser rent (comparatively), is better. The same holds good for most investments, including stocks too.
Business grows on Relationships and Networking. Owning a commercial space, you are more likely to enhance your professional relationships and build a better wider network.
The business of the Commercial tenant depends on his work space, hence, it is generally better maintained. In case of residential property, it is given a lower importance.
Unless you are obsessively rich, the idea of having a second house in some far away serene place (eg Kasauli for a Delhite), is a bad investment. If properly invested, the earnings from the same money could give much more than great holidays at the similar places, with full style and nil bother or hassle of Maintenance, cleaning, stocking, care taking etc. Any 2-3 BHK apartment could eat up at least 3-4000/ per month, even if it is not utilised for a single day in a year.
When you rent out a residential property, you keep bothering for the rental every month. However, if it is a Commercial property rented out to a Decent Company, your monthly rent will be religiously deposited in your account with TDS deducted. As no company can wait for the Owners to respond for minor repairs, you would never need to indulge in day to day repairs etc, saving a lot of headache for you.
A property which is not in use, suffers from disuse, resulting in its pipes, plumbing, fixtures and fittings and electrical appliances going bad; so will the Stainless Steel / MS works would either rust or tarnish beyond recovery. A seepage not taken care of in time, could lead to requirements of major repairs. Often anti social elements burgle into such houses and may establish it as their hideout too.
In very limited cases, wherein there are joint families running own business, etc, one could consider second home, which would ultimately become the first home for the son / daughter.
Problems of Commercial Real Estate
Normally these properties have higher maintenance cost, which is borne by the Tenant. Hence, if not invested wisely, i.e. if the space stays vacant, instead of earning, you would lose money in terms of monthly maintenance bills.
Vacating a Commercial property at times is a bit more difficult, as the Tenant’s business interest gets affected.
Costlier repairs and services. Unlike residential space, here one would need professional maintenance & repair guys as tardy jobs are not acceptable, specially in high end properties.
Deeper Pockets. Base price of any commercial property is generally higher than the residential ones. So, many are not able to implement this thought.
Tenant’s Business Closure Risk. Any risk of Tenant’s business closing is related to your risk. So better to go with big established names, rather than small businesses.
Your money is hard earned, so research, work out details and invest wisely. We at Colonelz Constructions provide advisory services in all types of works related to Real Estate. You could bank on us.
We believe in “Building Relationships – Business Happens”.
Happy earning & happier investing.
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