When you're looking to go into the real estate industry, there are many considerations you need to take into account. Whether it's residential or commercial, there are a lot of factors that can make or break your decision. In this article, we'll give you an overview of the market in 2022 and what role these considerations will play in your decisions.
Residential vs Commercial Real Estate
There are two main types of real estate: residential and commercial. Residential real estate includes houses, apartments, and condominiums. Commercial real estate includes office buildings, retail stores, and warehouses.
Investors typically earn higher returns from commercial real estate than from residential real estate. However, commercial real estate is also more expensive than residential real estate.
Rental Yields
Rental yield is a measure of how much rent an investor can earn from a property relative to the property’s purchase price. For example, if an investor buys a property for INR 100,000 and rents it out for INR 1000 per month, the rental yield is 1%.
Higher rental yields can be found in properties that are in need of repair or that are located in less desirable areas. They can also be found in areas that are well populated or are close to very active business hubs and major transport routes. However, these properties also come with more risk. Investors should carefully consider all factors before investing in any property.
How rental yields are changing
Rental yields are changing in a number of ways. One is that the overall demand for rental properties is increasing. This is due to a number of factors, such as the increasing cost of buying a home, the difficulty of getting a mortgage, and the flexibility that renting offers. As a result, rental prices are rising in many markets.
When considering commercial properties, rental yields are increasing because of the demand of Grade A spaces with newer amenities and the overall shortage of space in existing business prone areas. As more and more new areas start getting covered under business purposes, newer buildings will be coming up, adding to newer supply and preferential demand by companies.
Why commercial real estate performs better than residential real estate
There are a few reasons why commercial real estate tends to outperform residential real estate. First, commercial properties are generally larger and more expensive than residential properties. This means that they have more room for appreciation as the market grows. Additionally, commercial properties tend to be located in prime areas that see a lot of foot traffic and are close to amenities. This makes them more desirable to tenants, which can lead to higher rents and lower vacancy rates.
Another reason why commercial real estate tends to do better than residential real estate is because it is easier to finance. Lenders are typically more willing to lend money for commercial properties than for residential properties. This is because commercial properties are seen as being less risky and more stable investments.
Overall, commercial real estate is a more stable and profitable investment than residential real estate. It is easier to finance and generate income from commercial properties, making them a better choice for investors looking to make money in the real estate market.
A closer look at the potential returns of different types of investment properties
The potential returns on investment (ROI) from different types of investment properties can vary considerably. For example, single-family homes tend to have a higher ROI than multifamily properties. This is because single-family homes are typically less expensive to maintain and manage than multifamily properties. Additionally, single-family homes usually appreciate in value at a higher rate than multifamily properties.
However, multifamily properties often have higher rental yields than single-family homes. This is because multifamily properties typically have more units, which means they can generate more rent income. Additionally, multifamily properties are often located in areas with higher demand for rental units.
Going into the commercial real estate side of things, properties can appreciate at a much better rate than residential ones because of the simple reason that businesses will always need space to operate. Secondly, the long lease tenure also makes it better for the properties to appreciate in value over time.
Ultimately, the type of investment property that will provide the best ROI depends on a number of factors. These factors include the location of the property, the type of property, and the investor's goals and objectives.
What percentage of your income should be spent on housing and CRE investments?
There is no one-size-fits-all answer to this question. The percentage of your income that you should spend on housing will vary depending on your personal circumstances.
If you are renting, you may want to spend no more than 30% of your income on rent. This will help to ensure that you can afford other essentials, such as food and transportation.
If you are buying a home, you may want to spend no more than 28% of your income on your mortgage. This will help to keep your monthly payments affordable.
Remember, the amount you spend on housing should be based on what you can afford. If you spend too much of your income on housing, you may have difficulty paying for other essentials.
Now if you are looking to invest in real estate, commercial real estate will be a much better option and based on what your existing investments are, you can keep this option as a long-term investment, setting aside your surplus wealth as a part of this investment.
Conclusion
It's clear that the real estate market is becoming increasingly competitive, with yields on rentals dropping in many areas. However, there are still opportunities to be had if you're willing to put in the research. By carefully considering your options and doing your homework, you can still find places where you can get a good return on your investment. And if you are looking at beginning your journey with commercial real estate investment, Strata can help you in the same via fractional ownership.
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