Why do you need to reconsider your decision to invest in a 2nd home?
More and more professionals earning a steady income are looking to diversify their portfolios and are willing to look beyond conventional investment options.
Investing in a second home or investing in a commercial property can be two viable options for those who are looking to expand their investment portfolio. Both options have their own set of advantages and disadvantages, and it is important to weigh them against each other to make an informed decision.
In this article, we will explore the various pros and cons of investing in a second home versus investing in a commercial property.
Investing in a Second Home
Investing in a second home is a popular choice for those who want to have a vacation home or rental property. The former is a rare concept in India which is just catching on with the advent of portals like Air B&B, which facilitates renting out a room or an entire home for vacationers.
The main advantage of investing in a second home is that it provides a place for you to get away from the stresses of daily life. Additionally, it can serve as a source of passive income if you decide to rent it out to vacationers or long-term tenants. You can also benefit from tax deductions for mortgage interest, property taxes, and other expenses associated with owning a rental property.
However, a majority of the people invest in a 2nd home in the city they live, or in their hometown, for the purpose of collecting regular rental income. Also, investing in a second home has the potential for appreciation in value. If you invest in a desirable location and take good care of the property, over time, it will appreciate in value, providing you with a good return on investment if you decide to sell it later.
However, there are also some drawbacks to investing in a second home. One of the biggest disadvantages is the cost. Not only do you need to consider the initial purchase price, but you also need to factor in ongoing expenses such as property taxes, insurance, maintenance, and repairs. Additionally, managing a rental property can be time-consuming and stressful, especially if you are dealing with difficult tenants. Moreover, the average rental yield across cities in India is a meager 2-3%.
Investing in a Commercial Property
Investing in a commercial property is a viable option for those who want to generate income through renting or leasing out the space to businesses. The main advantage of investing in a commercial property is the potential for higher returns. Commercial properties typically command higher rental rates than residential properties, and businesses are often willing to sign longer-term leases, providing you with a more stable income stream. In India, the average rental yield is 8-12%.
Another advantage of investing in a commercial property is that it can appreciate in value over time, just like a residential property. However, commercial properties are generally more valuable than residential properties, so the potential for appreciation can be higher.
But investing in commercial property also comes with its own set of drawbacks. One of the biggest disadvantages is the higher cost of entry. Commercial properties are typically more expensive than residential properties, and they often require a larger down payment. Additionally, managing a commercial property can be more complex than managing a residential property, as you will need to deal with leases, zoning laws, and other legal and regulatory issues.
The 3rd Option – Fractional Real Estate Investment
It is now well established that Commercial Real Estate is the most lucrative investment option that offers a tangible and stable asset with higher rental income and greater capital appreciation. But the primary reason for people not considering this option is because of the high entry cost. Investing in commercial properties in Tier 1 cities will cost upwards of Rs. 1 Cr.
For investors who wish to invest in Commercial Real Estate but have a lower capital, can now consider the option of Fractional Real Estate (FRE) Investment option. FRE offers options to invest for as low as Rs. 2 lakhs. The way this works is that the available commercial real estate space is divided into smaller units (for eg. 1 unit could be 50 sqft). Depending on the available capital and risk appetite of the investors, they can pick up the number of units they wish to buy.
FRE also is a hassle-free investment option as you will be free of the responsibilities such as operational maintenance and finding tenants. Also, your risk gets automatically diversified as you will receive a proportionate share of rent of the entire building, even if some tenants vacate the space.