Shop or house: Where should you invest to earn more money?
Many people intend to buy property for extra income. They will continue to earn from rent and will also become owner of a property. In terms of investment, should you buy a residential property or a commercial property? What is the percentage of return from rent in residential property? What are the things you should consider while buying a property?
After Covid-19, there is good demand for both residential and commercial properties. This is the reason why rental income, that is, earnings from rent have seen a tremendous increase. Residential properties include houses and flats. Whereas, commercial properties include shopping complexes, malls, office spaces, warehouses, etc.
According to the housing rental index of real estate portal ‘Magicbricks’, there has been a substantial increase in average rents of houses in 13 major cities of the country. In the January-March 2022 quarter, rents increased by an average of 4 percent, in April-June, rents increased by 8.4 percent, in July-September quarter, rents increased by 5.2 percent and by 7 percent rate in October-December quarter. Then in January-March quarter of calendar year 2023, average rent increased by 4.1 percent. These cities were Ahmedabad, Bengaluru, Chennai, Delhi, Greater Noida, Gurugram, Hyderabad, Kolkata, Mumbai, Navi Mumbai, Noida, Pune and Thane.
How much rents have increased?
Suppose the rent of a house was Rs 20,000 in December 2021. In the January-March quarter, the rent increased by 4 percent to Rs 20,800. In April-June it increased by another 8.4 percent to Rs 22,547, in July-September quarter rent again increased by 5.2 percent to Rs 23,719 and in October-December by 7 percent to Rs 25,379. Then, in January-March 2023, it reached Rs 26,420 jacking up by 4.1 percent. So, in 15 months the average rent of a house in big cities of the country increased by about Rs 6,500.
What is the reason for the increase in house rent?
After the offices reopened post-Covid, people returned to the cities and there was a huge surge in demand. However, the supply did not increase as per the surge in demand. This was because developers faced many obstacles in completion of housing projects during the pandemic. This mismatch of demand and supply caused rents to increase significantly.
Meanwhile, during pandemic, homeowners could not increase property rents. To compensate for this loss, rents were increased rapidly after the situation improved. So, the rental income of residential properties is currently more than ever before.
If you want to buy property from an investment point of view. Then, it is important that you understand the concept of rental yield.
Rental yield means return on property from rent. In metropolises like Delhi-Mumbai, the rental yield of residential property is maximum 2 to 3 percent. Currently, it has increased to up to 3.5 percent in some cities.
On the other hand, the rental yield of commercial property is 5 to 6 percent. In high-end retail markets like malls or shopping complexes, rental yield goes up to 7 to 8 percent. The higher the rental yield, the higher the earnings in the form of rent. So, commercial property is always a better option.
Fincart’s founder and CEO Tanveer Alam explains that although the rents of residential property may be higher at some places right now but as soon as supply matches demand, it will decrease and come back to 2 to 3 percent. The biggest benefit of buying commercial property is long-term lease. Renters do not prefer to change location frequently in commercial properties. This results in earning of rent on regular basis. Plus, rent also increases according to the lease agreement.
In residential property, when a tenant leaves the property, there is lot of cost that owner has to incur for refurbishment (refurbishment) i.e., repairing expenses, wall painting expenses, etc.. People do not take into account such expenses.
Commercial property tends to be more expensive compared to residential property:
The rate per square foot for commercial property is higher. However, in some cases, the overall investment cost can be lower.
You can easily rent out an office of 500 square feet. But there is a problem in renting out a flat of the same size. And the rent is also lower.
If you have a house to live in and you want to invest for rental income. Then, it would be better for you to buy a commercial property. However, people buying their first property usually prefer to buy residential one. Because they feel a sense of security in buying a house. Make sure that you consider location, connectivity and amenities available before deciding on where to buy a residential or commercial property.