Commercial Property
Many people prefer Real Estate as their 1 stinvestment option. However, most of them are confused between to investment whether in Residential Real Estate or Commercial Real Estate (Commercial Property). Both routes are having their own pros and cons. Here, we will discuss some important aspects of Commercial Real Estate as under:-
- Types of Commercial Property Investment;
- Difference of Residential and Commercial Real Estate Investment alongwith their pros and cons;
- Valuation of Commercial Real Estate;
- Loan for Commercial Property or loan for purchase of commercial property
Now let’s discuss about the same as under: -
There are various types of Commercial Properties where we can do investment, some of which are discussed hereunder:-
Retail /Commercial Office Space/Commercial premises
Retail Commercial Space is basically used for any shops, pet shops, malls where products are being bought and sold either like wholesale market or retail market. Many Professionals like doctors, Chartered Accountants and small businessmen like free lancers, brokers, carpenter, tailor, Stationery shop prefer such retail /commercial office space/commercial premises for their practice/business. It comes in different sizes like:
Small Size Commercial Place :
Small Size 100 to 500 sq.ft. Such shop mostly prefers by small commercial business /es like Kirana Stores, Stationary Shop, Brokers, medical shop and even professionals like doctors and Chartered accountants etc. Many individuals prefer to start their small businesses for their earning through such shop.
Mid Size Commercial Place:
Mid Size 500 sq.ft. to 3000 sqft. Such space mostly prefers mid-size commercial business /es like Sanitary ware shop, Small franchises like D’Mart, Kidzee etc. Many individual prefer such space for their mid-size businesses.
Large Size Commercial Place:
Large Size above 3000 sq.ft. Such space is mostly preferred by High Networth Individuals (HNIs), Corporates but not individuals. Such big spaces mostly use for Banks, Corporates, NBFCs, Malls, Hospitals etc. Some time they prefer Commercial Building /s places.
Hospitality Commercial Space
Most hospitality industry prefer Commercial Real Estate space for their commercial business /es like Hotels, Banquet and Party halls etc.
Real Estate Investment Trust (REIT)
One more new way of Commercial Real Estate investment is Real Estate Investment Trust (REIT). It’s a kind of Mutual Fund where one can start Commercial Real Estate investment with a minimum investment of Rs.2 Lacs only.
Virtual Commercial Space
This is one of the innovative type of commercial real estate investment. Here, the commercial developer develops the big commercial space and you can invest in that commercial space for smaller portion as per your budget. You would not get the specific sq.ft. area in that commercial space, however, your registration for the investment is happened in Registrar Office as proof of ownership and title. You would not get the physical possession of that space. These commercial developers give the space on rent to various big brands and you get the portion of rent as returns of your investment.
Triple Net Lease:
This type of lease is most popular in United State of America. In Single Net Lease, tenant pays rent plus property taxes, in Double Net Lease, tenant pays rent, property taxes and insurance premium and in Triple Net Lease, tenant pays rent, property taxes, insurance premium and maintenance etc. Here, landowner need not to worry about other property expenses, however, he is responsible for structure, roof of house.
Commercial v/s residential or comparison of commercial and residential investment :
There are various pros and cons which mostly favour Residential Property than Commercial Property, hence loan for purchase of commercial property, loan for construction of commercial property and commercial property loan interest rates are costlier than Residential Property.
What makes a great commercial real estate investment?
Location advantage makes a great impact on Commercial Investment.
Retail Space
Footfalls: Footfall is a key factor in Retail space. Proximity to Residential Area, Metro, Business Districts creates high footfalls which benefit the shop keeper for their sales optimisation;
Tenant or Occupant Mix: Occupants in mall or market should complement each other to attract more footfalls. Diversification of products in local market and malls makes their sales optimisation.
Premium property: Premium properties also would be great commercial investment. Premium properties include Ground Floor, Front facing, 2-side / 3-side Open shops can be 50–100% costlier than other similar properties.
Office Space
Location advantage for Office space includes
Connectivity : Airport, Metro Road connectivity often benefits commercial property;
Business Districts : Central Business District, Secondary Business District and Primary Business District are more beneficial for office spaces.
Big Units : Bigger Floor Plates get interest from large corporates
How to do valuation
Your purchase decision needs to be depended on the Return on Investment (ROI). That you can assess by as under :-
Total Returns = Rental Returns + Capital Appreciation
Suppose you intend to purchase a Commercial Shop to the tune of Rs.40,00,000/- and as per your Survey the rental income will be 8% annually (Rs.3,20,000) and Capital Appreciation would be 10% (Rs.4,00,000) annually of your property value, then your total returns will be 18% annually i.e. (Rs.720000). That means you get 18% annual returns on your investment. This you can compare with your other investments.
There are various methods to do valuation of the proposed acquisition to know that you are getting fair value of the property proposed to be purchased. Here we will discuss, few among them :-
Fair Market Value :
You should do online and offline survey of similar properties valuation, their rental returns, capital appreciation, scope of business etc. You can add 5–10% premium, if the property location is quite favourable for business.
Rent Yield Method :
In rent yield method, first you need to calculate rent yield and based on the the rent yield, you can calculate the property value. The formula to calculate rent yield is :-
Rent Yield = Annual rent / Property Value
And hence accordingly the Property Value formula, would be :-
Property value : Annual Rent / Rent Yield
Suppose your annual Rent would be Rs.2,40,000/- and Rent yield would be 6% then your property value would be Rs.40,00,000/-.
Land and Building Method :
Here you need to calculate land cost per square feet, Building Construction cost per square feet and profit margin per sq.ft.
Suppose, your land cost would be 2000 sq.ft. and construction cost also is Rs.2000/- sq. feet and profit margin would be 1000 sq.ft. then, for 1000 sq.feet shop cost would be as under :=
Property Value = (Land Cost + Construction Cost + profit Margin) X Property Area
= (2000 + 2000 + 1000) X 1000
= 5000 X 1000
= Rs.50,00,000/-
Loan on Commercial Property :
Purchase procedure for under-construction commercial property and ready to move commercial property is more or less similar to under-construction residential property and ready to move residential property. For that, please read my post on step by step guide for housing finance.
However, Banks most often are reluctant to entertain the request of salaried people. Eligibility of Commercial Real Estate loan mostly depends on the income will be generated by the said acquisition means Returns on Investment (ROI). Usually business people who intend to use it for its business expansion, it’s a high chance to get his loan approved instantly.
Mostly every Banks offer loans to purchase Commercial Real Estate against the mortgage of the said proposed Commercial Real Estate Property.
Here, the said Commercial Property acquisition needs to be reflected in the Balance Sheet of the business person as creation Fixed Asset for business expansion. Further, its repayment capacity, will be depended on the income generation capacity from the said expansion which needs to be reflected in the future projected financials for entire tenure of loan like Balance Sheet, Profit and Loss account and Cash Flow Statement over a period of 7–12 years (tenure of loan).
By analysing the said repayment capacity, economic and financial viability of the project, financial viability of the business person, the valuation of the proposed security (commercial property), the lender may take a call for finance.
For apply of loan, you need to submit the following documents:-
- KYC documents of Sole Proprietor / Partnership Firm like PAN Card, Aadhar Card, Photographs;
- Business Proof as License for Business, Udyog Aadhar, Address proof of Business etc.
- Last 3 years IT returns alongwith Balance Sheet, Profit and Loss Accounts etc.
- Future Projected financials i.e. Balance Sheet, Profit and Loss Account and Cash Flow Statement etc. for entire tenure of loan (7–12 years) etc.;
- Last one year Bank Account Statement where the turnover of Business is reflected;
- Property documents like copies of chain of title documents, NOC from concerned authority, Commencement Certificate, Building Approved Plan, Occupation Certificate in case of ready to move property etc.
The loan expenses will be more or less same like Residential Loan like :-
- Valuation Charges;
- Title Search Charges;
- Processing Charges;
- Intimation Charges;
- Stamp Duty Charges
Most people use residential property for commercial use. Mostly people convert their residential property into commercial for better rental income.
Now a days, you can online also do commercial property search through commercial property websites like www.99acres.com , www.nobroker.com , commercial property portals and apps like OLX, Magicbrikcs etc.
Originally published at https://loans-review.com on December 20, 2020.
