Commercial vs Residential – Where you should Invest in 2022?

Real estate is one of the best and safest investment opportunities in Pakistan but where you should invest – Commercial vs Residential property?

There are many reasons to invest in real estate. People are usually confused about investing in real estate or stocks. Real estate investment not only provides you with a tangible asset but also ensures good ROI (return on investment) and financial stability in the longer run. Interestingly, there are multiple options for real estate investment available in the market, each with its own distinctive characteristics.

The two most common real estate options in Pakistan are residential areas and commercial areas. When we talk about the aforementioned types of property, we usually witness two kinds of groups. Some people prefer residential properties over commercial properties and vice versa. In short, the ‘commercial real estate vs residential real estate’ debate is always under the limelight.

Commercial vs Residential – Why do People Prefer one Property over the other?

Think no further because we have come up with a comparison for you. This article will go in-depth and analyze the characteristics, pros, and cons of both properties so that you can make a better and more informed decision.

So, let’s get started.

Difference between Comercial and Residential Properties

First of all, you need to know about the basic difference between residential property and commercial property and the tax ratio on these properties. Basics about real estate include how many square feet are in one marla etc.

Residential properties and commercial properties have certain distinctive features that make them poles apart from one another.

Let’s have a look at these factors:

According to Investopedia, residential property is a type of leased property, containing either a single-family or multifamily structure that is available for occupation for non-business purposes.

On the other hand, commercial property is quite different.

According to Investopedia, commercial property refers to real estate property that is used for business activities. Commercial property usually refers to buildings that house businesses, but it can also refer to land that is intended to generate a profit, as well as larger residential rental properties.

Comparison between Commercial vs Residential Properties

Types

Residential properties include homes, apartments, condos, flats, and vice versa. These properties are usually smaller in the area as compared to commercial properties. Also, the number of units in a residential property is far less than the commercial property.

Similarly, in the case of commercial properties, you would generally find offices, shops, warehouses, and showrooms and vice versa. These properties are usually located on the outskirts of the city or in industrial areas. According to Condoblackbook.com, the demand for commercial properties such as condos will increase at a high pace.

Primary Purpose

As the name suggests, residential properties are usually made for nuclear families or joint families. The sole purpose of a residential area is ‘accommodation’. People usually use these for living and renting purposes. Residential property is treated as a necessity, not as a business avenue or an investment opportunity.

On the other hand, commercial properties are acquired for business and investment purposes. For example, people get office spaces and shops to earn monthly income. If you are still confused, check out whether to invest in a shop or a house.

Opportunities – Commercial vs Residential

Every real estate type comes with a specific set of opportunities. The primary objective of a residential property is accommodation or renting. When the right time comes, you can even sell out your property to earn good returns.

Contrarily, commercial property is purely used for business and commerce. The shops and offices act as business centres and people use them for business purposes.

Capital Required

Compare to commercial property, residential properties are smaller in size and the capital needed to acquire them is low. With 10 million rupees you can easily get a house in a posh area.

Get to know the cost to construct 5 marla, 10 marla and 1 Kanal house in Pakistan. Whereas, if you want to get a commercial property at a good location, you need more money.

Laws and Regulations

The laws and regulations associated with the residential property are different from commercial property. Residential property laws are more lenient and they tend to focus more on the rights of the tenants.

On the other hand, commercial property laws are strict and focus on equal rights. Both parties negotiate and come to common ground because this is how business works.

Pool of Consumers

Due to an increase in population, the demand for houses is increasing at a fast pace. As a result, the pool of people looking for residential property is large. That means it is easier for you to sell/rent out your house. In short, the demand for houses and other residential properties is more than the office spaces and shops.

The demand for office space, shops vice versa are dependent on market trends and the overall economy of the country. If the market is doing good and the economic conditions of the country are satisfactory, then you will be able to rent out your space at a good price quite easily.

During the Financial Crisis

Residential properties tend to perform better in financial crises. The demand for these properties does not get much affected by extraneous economic conditions.

On the other hand, the demand for commercial properties is highly dependent on the economic and financial health of the country. In short, the prices may fluctuate more.

If you want to buy a commercial property, do research on the latest and future real estate market trends to get to know the best real estate commercial projects by top construction companies and then invest accordingly.

Maintenance Cost

The maintenance cost of a residential property is low. The electricity, gas and other amenities cost you less as compared to commercial property. When you own commercial property, your tax bracket gets different. Construction and remodelling of a commercial or residential property is not a piece of cake.

Apart from the tax, you have to pay a larger percentage of security costs, electricity, water, gas, and vice versa because the consumption of these things is more in a commercial property.

Structure and Design

The construction cost of a residential property is different from a commercial property. Unlike commercial properties, the architectural design and interior of a house or an apartment are entirely different, leading to different costs.

A commercial property incurs different costs. For instance, you may have to incur warehouse costs, pipes and wiring costs, etc.

Returns

Commercial properties yield high returns. The residential properties can only earn through renting and reselling of property.

If you own a commercial property at a business hub, you are good to go because the demand to acquire your property will be very high in the market.

Lease Time

The lease time of commercial properties is longer. Usually, people do not lease out a residential property in Pakistan. They look for a house for sale or a house for rent.

So, these were some of the key points of both properties. We hope these factors will help you in making a good decision. Before making any kind of investment in real estate, get to know the things to consider before investing in real estate.

Vacant period

Vacant periods differ between commercial and residential properties. When it comes to commercial properties, the vacant period is extended. For example, there are certain areas in the city’s suburbs whose demand is not usually high. Any commercial property in these lands might remain vacant for a long duration of time. 

On the other hand, residential properties are always in demand. People need houses to live in. Hence the demand for residential properties always remains high. This means, if you have a residential property in the city, the chances of it staying vacant are meagre. 

Rental yields

According to Mortgage Choice, rental yield is the amount of money you make on an investment property. It is calculated by measuring the gap between your total costs and your income from renting out your property.

A higher rental yield means higher returns on the property. It is seen that commercial properties offer rental products between 5% and 12%, whereas residential properties offer around 3-4% yield.

One of the reasons for higher rental yield in commercial properties is that Pakistan is a developing country that is progressing at a very high pace. With the technological boom and advancements in science and business, new avenues are opening in the county.

As a result, the demand for commercial properties is increasing by leaps and bounds. Many national and international investors are looking for rental properties to establish their business ventures in Pakistan.

Annual rents

In many places, residential properties are not subjected to fixed annual rents. For example, owners of residential properties might not increase the house rent every year. On the other hand, the annual rents for commercial properties are fixed and usually increase annually. 

So, if you are looking for an investment opportunity where the rental yield increases at a slow yet steady pace, commercial properties might be perfect for you.

Finances

Commercial properties come with higher risk factors than residential investments. In other words, it is safe to say that the residential market is less volatile than the commercial properties. Due to this reason, the loan structures for residential and commercial properties differ significantly. In many financial institutions, banks generally require a minimum deposit of 30% for commercial properties. 

On the other hand, loans are given to residential investors with smaller deposits and accessible terms and conditions. Commercial properties might also come with higher interest rates and administrative fees.

Knowledge

Real estate is a whole science, and one cannot enter the real estate market without proper knowledge and skillsets. If you are new to real estate, we suggest starting with residential properties such as plots, houses and apartments. These properties are easy to manage, and you do not need advanced knowledge to deal with residential properties.

On the other hand, you need advanced knowledge and skillset to deal with commercial properties. It is very volatile, and a lot of economic factors alter the demand for commercial properties. 

Economic shocks

External economic factors play a massive role in the real estate market. It is seen that commercial properties get affected by economic factors more as compared to residential properties.

In other words, it is safe to say that inflation has a more significant effect on commercial properties than residential properties. Despite inflation and other external factors, the demand for residential buildings remains in order because no matter what happens to the economy, people still need houses to reside in.

This is all you need to know about commercial vs residential property. Go through them and let us know if you have any queries. We will be glad to help you out. Get to know real estate marketing factors.

Disclaimer

None of the information published in this article should be construed as investment advice. We strongly advise our readers to always do their due diligence before investing in any project. It is the reader’s responsibility to know the laws regarding investments in their region.