Investing in commercial real estate: pros and cons, tax implications explained
By Anurag Goel, Director, Goel Ganga Developments
Real estate investment decisions are usually difficult, especially when it comes to choosing between residential and commercial property. It is widely accepted that investing in commercial real estate is reserved for wealthy individuals and companies. While this is sometimes true, it is not always the case and commercial property, including shops and showrooms, can be acquired by salaried individuals.
Due to its consistent returns, higher rental value and passive income, commercial real estate is an attractive investment class. It has enormous growth potential and a constant cash flow in the form of rents. This is why commercial real estate investment is becoming more and more popular among investors. Let’s assess the pros and cons of buying a commercial property.
Benefits of investing in commercial real estate
High rental income:
Commercial real estate has a higher rental yield than residential real estate, which is advantageous. Commercial properties have an average rental yield of 8-11%, while residential properties have an average rental yield of 1-2%, a yield 4 times lower. The earning potential for CRE investment varies greatly by area. If the investment is made solely for the purpose of generating income potential through rental income, commercial real estate is unquestionably superior.
No furnishing costs:
One of the most attractive aspects of investing in commercial properties is the zero furnishing cost of the property. Indeed, furnishing costs are the responsibility of the tenant once the property has been rented. As an investor, you can provide your tenant with raw real estate. This benefit stems from the fact that any company renting the property will be required to adhere to its operational guidelines.
Ease of dealing with tenants:
Commercial real estate tenants are generally well-established companies. Dealing with corporate tenants is always easy and there is rarely a need to hunt them down for rent. If a reputable bank or corporate tenant occupies a floor or section of the property, the rental yield for the rest of the property will increase.
Commercial properties are generally leased for 10 to 20 years, with the possibility of renewal. In addition, the leases include an annual rental value appreciation clause. As a result, a commercial property owner can expect regular and consistent returns.
Disadvantages of investing in commercial real estate
In general, commercial properties require a significant investment. In the case of a commercial property, a larger sum is involved than in the case of a residential property. After considering your other financial needs and commitments, you must be prepared to invest a large sum. and the minimum investment in commercial real estate investing is generally out of reach for the average retail investor.
More expensive loans:
Commercial real estate loans are more expensive than residential real estate loans, which is a major downside of commercial real estate. The interest rate and terms will also be determined by the type of property, investor profile, location and repayment period.
Management of complex assets:
Finding the right tenant for a commercial property like a store or showroom can be a bit more difficult than finding a tenant for a residential property. CRE tenants are businesses, not individuals, who need seamless end-to-end asset management. Retail investors generally lack professional expertise in managing complex business assets.
Further research required:
The investor should thoroughly research the overall cost of acquiring the property, taxes involved, zonal laws and regulations for renting, and the rental income potential of that building or store. Due diligence and market knowledge are required to find the right property and location. Due to a lack of market knowledge and other resources, an individual investor may find it extremely difficult to invest in commercial properties.
Tertiary real estate investment in condominiums is still in its infancy, so there are no specific regulations for this asset class. According to the current income tax regulations, if you do not own the property and you sublet it, the income from this subletting of commercial property will be taxed under the heading “income from other sources”.
If you operate a business center on your property while providing other services, the income can be treated as business income as long as the various services and rental of the space make up a significant portion of the total. Except in these circumstances, any income you receive in relation to property you own will be taxed under the heading explicitly designated for property income, whatever name the income is given. There are only a few legal deductions that can be made from rental income as income from the rental of such property is taxed under “income from the ownership of the house”. It is best to avoid listing your actual rental income under “business or professional earnings and gains” in order to deduct other costs.
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