Should I Rent My Property To Businesses?
You are one of those who did not lose faith in real estate even when it went through the worst. You are quite certain that India's property markets will once again spring back to recovery and be in the pink of health in no time at all. This faith prompts you to put your money into a real estate asset to earn a good income in the form of rent. Ere long, you would become a landlord and will be ready to make the most of your prized possession. However, there is one little doubt you have about this move. Would it be good to buy a property that should be given on rent to individuals? Or, would it be more profitable to rent this property for commercial use?
You do know that when compared to residential renting, the profits earned through commercial renting are much higher—industry experts peg the annual rental yield between six and ten per cent; this could at best three or four percent in case of residential renting. Considering the whole purpose of the investment is to earn good profits, should you rather not go with the second option? The truth is that when you arrive at the final calculation, the profit may not look all that lucrative.
Here are some points to consider:
- There is an inherent difference between residential and commercial renting. While market conditions rarely impact the former, they have an unfailing impact on the latter. As long as the markets are doing fine, there would be an uninterrupted supply of good rent. In case things go haywire, your loss would also be substantial in case you let your premises to businesses. This is not a segment a risk-averse investor would like to explore. When tech giant Tata Consultancy Services shuts operations in Lucknow, for instance, it is not just some employees who would have to shift base from the Uttar Pradesh capital. The individual who owns the premises will also suffer a major jolt, financially speaking.
- In case of a residential property, you, as the landlord, will be solely responsible for fixing all the leaking pipes and the seeping walls and the indisposed toilets- in short, everything. The same is not true in case the property is given on rent to a business. This is a major relief point. But, be mindful of the fact that commercial renting involves lease-based agreements under which the property is rented for a longer period. Even if you want to evict your tenant because of some nasty business that took place between the two of you, you would be legally bound to tolerate him till the end of the lease period. However, this works both ways. An agreement in case of residential renting is made for a period of 11 months. After this period, your tenant may decide to vacate the premises, unwilling to take the hike in the rental amount. This would force you to look for a new tenant, and go with the whole drill again and again. If the property is given to a commercial set up, a long lease period would ensure you do not waste a great deal of your time looking for tenants.
- Without a doubt, you have to formalise the process when you give on rent your property to an individual. However, the legal work involving commercial renting may seem ginormous in comparison. Doubtlessly, there is a reason behind that. Tax and regulatory laws on the two renting segments are different. The commercial segment has laws much stricter laws, as a matter of fact.
- Under the goods and services tax regime, a landlord who has given on rent his property for a commercial purpose will have to pay 18 per cent as tax in case his annual rental earning exceeds Rs 20 lakh. On the contrary, there is no GST on the rent you earn by renting your property to an individual.
- May we state the obvious that it would cost you much more if you plan to invest in a property that should be given on rent to businesses. In case of residential renting, your property will find takers even if it is equipped only with the basic facilities. The same cannot be said if you were to give this property on rent to businesses. However, considering you would also earn a better yield, this could all be worth it.
Also Read: Is Rental Home Worth The Headache?