Things to keep in mind while investing in commercial real estate.

Date : 24/09/2022
Read: 4 mins

Things to keep in mind before investing in commercial real estate.

Taking real estate decisions has never been easy, especially when choosing between commercial and residential properties. For a beginner or someone new in the business, concluding could be even tougher, given the lack of clarity on the pros and cons of both properties. There is a popular belief that commercial real estate is only for rich businessmen and famous corporations. This might be true in some cases but not always, as salaried employees can also enter the commercial real estate business. They can even be quite successful at it with proper knowledge and clarity.

Commercial real estate has always been very attractive, given its high rental value, constant returns, and passive income. Constant rentals in commercial real estate also create a constant cash flow.

Advantages and Disadvantages of commercial real estate

Let us look into the advantages and disadvantages of commercial real estate.

High rental income - With a higher rental yield than a residential property, commercial property has quite an edge. Commercial properties have a four times higher yield than typical residential properties. The potential, however, depends a lot on the area. If the main motive is earning from rentals, commercial properties are superior, without a doubt.
Easy to deal with tenants - Tenants in commercial properties are generally well-to-do companies. Once a widely known corporate tenant with a good image rents your property or even a portion of it, the remainder of the property is bound to rise. Thus, usually, there is no headache for on-time payment of rent and dealing with them is also smooth.
No cost of furnishing - Zero furnishing cost is one of the key advantages of a commercial property. As an investor, you can provide your property without any furnishing, and the tenant would not java anything to complain about. The total furnishing cost will thus be borne solely by the tenant. This is because, most of the time, a company is a tenant and must stick to the company guidelines.
Long-term commitment - The lease for a commercial property is usually for a decade or two, and there is also an additional opinion for renewal. Thus, an investor or owner can expect consistent and high returns.

Now let’s check out the cons of investing in a commercial property:

High investment - This is one of the major disadvantages of investing in a commercial property. Also, quite a larger sum is involved in the case of a commercial property than a residential property. This is mostly why people think that commercial real estate is for the rich business class, as the minimum investment needed could be unaffordable for an average investor.
Complex asset management - Searching for the right tenant for your commercial property could be a lot more difficult than searching for a tenant for a residential property. For corporate tenants to work smoothly, complex commercial assets need to be managed smoothly. This is something that an average investor may lack.
Costlier loans - Loans for commercial property are far more expensive than loans for residential property.
Proper research - The investor should conduct extensive research regarding the cost of acquiring the commercial property, earning potential, taxes, laws and bylaws of that specific zone for renting out a commercial property, and so on. Thus, due to a lack of proper research or knowledge of the market, an average investor may find it difficult to invest in a commercial property.

What are the Tax implications on a commercial property, and what should be done?

The tax implications also play a huge role in determining the success of commercial property. The taxation of commercial property comes under the head 'Income from house property.' But, if you have other services on the property apart from rent, those can come under the section of business income. In the case of business income, you can claim various deductions for expenses. The taxation on the rent is as per the tax slab, and a deduction of 30% is available to account for the repairs, maintenance and damages.