The majority of today’s population has participated in the race to earn passive income from various channels to stabilise their future. Among various promising options for earning passive income, commercial property investment has become a promising passive income option.
Investing in commercial properties provides a potential for substantial return and grants investors ownership of a tangible asset to own and be appreciated over time. This dual benefit makes it a preferable passive income channel for those to secure their financial future while having a physical space that can be utilised or leased when needed.
Fractional Property Ownership
Many professionals and happenings in the industry recommend fractional ownership in commercial real estate while stressing its positive impact on capital appreciation, rental income, or resale in the future. Below is a key takeaway:
Investors can pool their funds to buy one commercial property as a group. Pooling their funds together allows a group of investors to pool their resources and provide access to larger value-added real estate assets that they would not have access to alone.
The large financial burden of the commercial property can cause some hesitation for a potential individual buyer. While that burden can certainly occur or, at quick notice, it is not burdensome; they are potentially pooling their resources, costs, and responsibility, all as one group so that owners can share the costs and risks of this burden.
All of the commercial property investors in India are ultimately pooling risk with one another, with each other sharing in the market conditions, when buying commercial property while balancing their overall portfolio.
While commercial property is experiencing growth, the Grade A office market should benefit.
It is very important, when purchasing a commercial property with long-term tenants, to evaluate how reliable the company or tenant is, and that they continue to pay rent on time.
Sharing ownership of property affords the potential for everyone involved to benefit from any capital value increase. In a rising market, property values and rents tend to increase together.
Generally, commercial properties appreciate fairly quickly due to the fact that they are stabilised, tangible assets that have ongoing demand.
If investors decide to cash out of their investments, they can receive a return on their investment by selling compact properties.
Regular Investing in Commercial Properties
Fractional ownership of commercial properties is an interesting investment option with the potential for good returns. It allows multiple investors to work jointly at home and share the benefits of ownership without the need to pay the full expense of simply obtaining property.
Though it provides many benefits, fractional ownership in commercial property is relatively new and does not have widespread options for investors in India — although it is evolving in the current market.
For individual investors considering entering the fractional ownership commercial property space, there is a well-established process to invest. It generally involves a fair amount of research, understanding legal requirements, determining the value of the property, and how much of a partnership stake may be appropriate for the investor.
This is a new way for individual investors to access being an owner of reputable commercial property, as well as diversify portfolios with a level of risk mitigation.
Selecting a commercial real estate unit
Conducting due diligence
Executing the sale deed and paying the stamp duty
Leasing the commercial unit
Signing the lease agreement
Maintaining in good working order
Collecting rent and breaking even on the investment over fixed rent
Profiting from the investment both on the capital appreciation and rental return.
Prior to making money from commercial property investment, it's essential to know what kind of income you're dealing with - active, passive, or portfolio.
Active income is money you get from working, whether that's as an employee or an entrepreneur/self-employed person.
Portfolio income comes from things like mutual funds, stocks, and so on. Passive income comes from things like commercial property.
How to Start Earning?
Pre-leased Properties
Pre-leased properties are booked to tenants and then sold to a buyer, with the monthly rent providing an income. This is a better option as it gives the buyer more control over the investment with predictable income based on the established rentals.
The investment returns start from day 1 with a return of 5-7 per cent based on the property type.
The risks are lower since these properties are already ready to move into with tenants occupying the premises.
You are able to pay 20 per cent as your contribution and potentially have options such as 80 per cent lease rental discounting if that option is available.
The minimum lock-in tenure is between 1-5 years.
You will be paying a much higher amount for pre-leased properties as they will come with an income, and you may have to find new tenants again if the tenants you inherit have finished their agreement period and have not renewed their lease.
There will be lower capital appreciation benefits as the properties will not be sold as premium properties.
Under-Construction Properties
The developer's risk of construction delay
Projects that stall for long periods of time
You can focus on what is also known as super-prime commercial real estate; properties with prime location or configuration parameters for strong demand and supply drivers, developers with a good reputation, and configurations that favour tenants
Longer-term investors should find value in favourable conditions for buyers; you can buy these developing properties for far less than completed properties and at relatively lesser rates of interest
The returns will be much better, rising up to 10-12% plus some would say can be experienced profitably
The acquisition cost (per sq ft) would be pretty attractive by the time you receive better returns than pre-leased properties
There would also be more potential for capital appreciation and attractive construction-funded payment plans available
The risk of the investor will continue to lie in timelines of occupancy and finding tenants while awaiting the completion of the project.
Ready Commercial Properties
End-users select them because there are no risks of getting possession late, getting delayed deliveries etc.
The returns will be lower relatively because you are paying a higher amount to buy the ready property
It requires a 100 per cent paymeift city nt upfront, which is also a consideration
In most cases, returns may not exceed 8 per cent
Sometimes it is difficult to get tenants The acquisition cost is only based on current market rates
There is a good possibility of capital appreciation
Final Say
Generating income from your commercial property cannot only be done, but it is a smart thing to do if done correctly. You can lease your entire property to a single tenant, lease your property to multiple tenants, tap into your property’s potential, or consider a more passive form of income like a real estate investment trust (REIT). But you should be aware that making a success of commercial real estate requires knowledge, a plan, and professional management.
This is where RES Management comes in - with years of experience and an understanding of the local commercial real estate market, RES Management assists property owners in maximising returns and minimising burdens. Do you want your property to work for you? Contact RES Management because it is time to make money smarter.
