If you are considering a real estate investment in Pakistan and are hoping to secure good returns in the long run, you might be debating between commercial vs. residential investment and which would be a better addition to your portfolio. Check out the factors that will help you compare both types of investment to make a wiser decision.
Commercial vs. Residential Investment—Which to Choose and Why?
There are a number of factors that can help you decide between a residential vs. commercial real estate investment. Check out a basic comparison between commercial and residential properties in the infographic below:
This shows that we can differ between commercial and residential investment on the basis of 8 major factors. Let’s talk about each of these below:
One of the key distinguishing factors between commercial and residential real estate is the type of properties you can invest in each category. Residential investment primarily focuses on houses, flats (including penthouses), and plots that are dedicated to the construction of a house. In contrast, commercial investment caters to shops, offices, as well as plots that can be used for the construction of an office building or a plaza.
Choosing between residential and commercial investment also depends on the purpose behind your venture. Are you planning on using the property for your own accommodation or business needs, or is it going to be a means of regular income? Do you simply want to hold on to the property for resale at a later date?
Residential properties are generally used for self-accommodation or as a rental property for potential tenants, which allows you to earn monthly income from the home. Alternatively, you might also consider a long-term residential investment in a house or plot with the hopes of selling it for a greater profit in the coming years.
In contrast, commercial properties attract businessmen and business owners who require office premises for their staff or a shop to display their products for sale. Commercial investors might also be interested in purchasing an empty plot of land and converting it into a warehouse or an office building, where different offices can be offered for rent or for sale to various organisations. You can use some easy tips to buy commercial plots in Pakistan for this purpose.
There are a number of factors that can increase the worth of your property, including its location, the neighbourhood it’s in, the amenities nearby, and so on. Thus, while residential properties are available in varying sizes, the cost can differ from city to city and project to project.
Commercial properties, however, are impacted by a different set of variables. A road front location of a shop and an easily accessible office building are two of these. But what’s important to note here is that investing in commercial property is not only expensive overall, but there’s also a restriction on sizes of commercial plots and shops, with a smaller range available.
Residential property owners usually have a lot more freedom in terms of design, structure, construction bylaws, and rental agreements. It is also easier to build a residential home with fewer zoning and planning permissions needed. On the other hand, if you decide to buy a commercial property, the laws and regulations become stricter, and you’ll need to cross several hurdles to get the respective permissions to build and design as per your preference.
When you debate between a commercial vs. residential investment, you’ll also need to think about which one works best for you in case of an economic crisis. The fact remains that the demand for housing rarely falters, with almost everyone needing a roof over their heads, with whatever savings they have and whatever rent they can afford. However, the moment the economy takes a dip, many companies, stores, and organisations might consider reevaluating their expenses, their premises, their overheads, and so on. So, if you have a deal underway and the economy falters, you’ll be in trouble. While residential investments remain stable in comparison, commercial ventures will rise and fall in value with the financial health of the country, and the stakes will obviously be higher here.
Let’s now consider the pool of investors/renters you have at your disposal. The demand for housing never really ends, so there will usually be a constant demand for properties and a large pool of buyers willing to rent/buy your house if you choose to rent/sell it. But on the other end of the spectrum, commercial establishments are only in demand by firms, organisations, and retailers, all of whom will not be looking in the market for a second option if they already have a well-established setup.
However, there’s an upside to buying a commercial property. If you do decide to rent it out, you can count on finding reliable tenants with long-term leases, and a decreased tenant turnover, as offices rarely change their location every six months or even yearly. Residential tenants, though, might leave your rental unit suddenly, leaving you with an urgent vacancy to fill on an immediate basis.
This is one aspect where commercial investments take the lead. You’ll generally earn a lot more in terms of renting and reselling a commercial property in comparison to a residential home. While this type of investment has greater risks, it has greater rewards as well. This is particularly because it is easier to increase the value of commercial real estate over time. If you have a successful shop that generates revenue, selling it to the next owner is going to be a lot easier than adding an extra room to a residential property to boost its price.
When it comes to maintaining your real estate investment, residential properties are lighter on the pocket, primarily because your tax bracket changes as soon as you declare yourself as the owner of a commercial property. Thus, not only will you be paying more taxes, but you’ll also be paying higher utility bills, as is the norm with all commercial establishments because their overheads are generally costlier.
However, there is a silver lining to it. As a landlord of a residential rental unit, you might have to pay for all of the maintenance and repairs inside the home. On the contrary, you can choose to draft a contract while leasing your commercial premises that puts this responsibility on the tenant using the space for business. This frees up some of your maintenance responsibilities as well as offering better savings in the long run. Check out our guide on renting commercial property for more information in this regard.
Ultimately, you need to decide what type of real estate investment is best for your particular needs and what you want to achieve from it. It is also important to browse the market thoroughly for both options before you choose a commercial vs. residential investment for your next venture. You can also consider entering the market with a residential investment and moving on towards commercial investments after gaining more experience in the field. Don’t overlook the most important features if you decide to buy a house instead!