Commercial Property means property or real estate that is built for generating income. It can be office space, garages, stores, malls or factory or industrial centres.

Traditionally institutions, organizations and individuals with very high networth would only invest in commercial property.  This is changing now as retail investors are realizing that there is a lot of investment potential in this area. Moreover this can be an additional asset class to bring diversification to the investment portfolio. Nowadays developers are also offering smaller units of commercial property for sale so that retail investors can buy. Banks also offer loans up to a certain amount for such investment purposes.

As a retail investor, there are three ways to invest –

• Buy commercial property directly
• Buy stocks of organization involved in commercial real estate
• Buy units of Real Estate Mutual Funds.  These funds invest in infrastructure projects and you can buy units of these MF schemes.

You can use the property for yourself. For example if you are a professional, you can use it for your practice; else you can rent it out to a third party.

You can get returns in the form of property appreciation as well as get income if you rent out the property. In some cases, the party that has taken the space on rent pays not only the rent but also gives a share of the revenue.  You should of course evaluate the potential of returns of the property before you invest. If you invest in the initial development stage, you can get good returns in the medium to long-term horizon if the investment decision is a sound one.

The decision to invest or buy commercial property requires a fair bit of research and analysis. You have to consider the following factors before making the ‘Buy’ decision – 

• The real estate developer whose property you are looking for should be a reputed builder who has a proper plan in place regarding the building and development of the property. You should go in for a developer who has built a few good quality properties. Property management should be in good hands.
• The location of the property is also important. For example if you are buying space in a mall, the mall should be in a place where there is enough population, good population growth rate, public transport and infrastructure development so that there are enough footfalls in the mall. If it is not a developed or developing area, the investment will not give good returns.
• You should be aware of the maintenance charges, property tax, insurance, lease information if any etc.
• You should enter into the deal with a lawyer and/or experienced real estate agent so that the finer details are chalked out and well understood by all parties involved.
• You should compare the returns potential (cash flow, property appreciation) with the purchase price (total cost considering the interest if there is a loan involved)

We would be interested to know of your experiences in such an investment if any.

This article was originally published on Stockmusings.com

Vidya Kumar
GettingYouRich.com