Enjoying high returns in the form of a secondary income is one of the biggest perks of investing in real estate. However, the question lies in which type of rental income is more beneficial – residential or commercial? It is a good idea to think about the type of rental income you are expecting from your property before you make the investment. However, there are a number of factors to consider before you make the decision. A few of them are discussed below:
Availability of tenants
Checking the availability of tenants is one of the first steps towards choosing between a residential and commercial rental income. The rental housing demand in Tier-1 and Tier-2 cities are on a huge rise due to rapid industrialisation and urbanisation. People are migrating from different cities in search of jobs opportunities and educational prospects. It is easier to identify a large tenant pool for residential properties here when compared to commercial properties. But when it comes to renting out commercial properties, the size of the tenant pool is considerably low. Before taking a building on rent, commercial establishments consider a variety of factors such as infrastructure, presence of competitors and scope for expansion. Also, it is difficult for the owner to check whether the commercial establishment is a profitable one registered by law.
Be it a residential property or a commercial building, location is an integral factor to yield a huge rental income. For commercial establishments, you can expect a high rental income in a location where vacancy is less than 5 percent. In this case of low vacancy, there is a dearth of supply and it is less likely that the tenants would vacate. There is a larger probability of getting higher rent for the property owner. However, if the location has a higher rate of vacancy, the tenants would move and negotiate on rents. But when it comes to residential properties, the rental income depends on proximity to educational institutions, hospitals, malls, restaurants and other important amenities. If you are renting out a house in a posh locality, then the rate of rental income will be very high. Business firms, on the other hand, will choose a location considering factors such as proximity to warehouses, tax free zones and transport hubs.
The costs for initial functional set up also plays an important role in determining the rental income of your property. You need to provide only minimal infrastructure if you are renting out a residential property. These basic facilities include electricity, water and sewage. But commercial properties, on the other hand, require higher operation costs. Apart from the basic amenities, the owner must acquire the necessary permissions and clearances for running a business in that particular locality. For example, if you are renting your property for a mall, it requires an elaborate infrastructure and huge amount of funds in the process.
Rental income from any property greatly depends on its lease tenure. Residential property leases are less complicated when compared to that of commercial buildings. Ideally, the time frame of most of the commercial leases will be from 3-20 years whereas, for residential properties, it could be just a few months. Also, the owner of a commercial establishment has an edge over a residential property owner when it comes to increasing the length of the lease tenure. Generally, the clauses in commercial leases are stricter which makes it difficult for the tenants to break rules. But residential leases have a shorter timeframe and are easily renewable.
The two parties involved in the rental agreement – the tenant as well as the landlord – should be aware of certain responsibilities and obligations. The nature of these responsibilities varies depending on whether the property is residential or commercial. Once a residential property is rented out, it is the responsibility of the owner to bear the repair and maintenance costs. Here the owner can also provide a home maintenance checklist to the tenant at the time of finalising the rental agreement. But in the case of commercial buildings, these costs are borne by the tenants. Also, business owners tend to maintain the property better as the look and feel of the building directly affects the functioning of their business. Sometimes, business owners also make different alterations in their infrastructure in order to suit different business requirements.
Apart from these pointers, there are other additional factors that play a vital role in determining the rental income of both residential and commercial properties. These include square footage of the area, parking allowances, quality or the age of the building, social infrastructure and nature of tenants in the locality, to name a few. Visit Lancor if you are looking out to make a property investment in some of the finest residential and commercial properties in Chennai.