Commercial Real Estate Compare

Additional Useful Information

• Since Commercial Real Estate transactions involve large amount of money and heavy legal compliance, they take a lot more time to be completed as compared to equity and debt investments.

• When it comes to commercial real estate, ownership is usually classified as direct ownership. This means the investor has all the rights on the property for an indefinite period. However, if the property has been leased out, the owner may temporarily lose some rights to the tenant.

Returns *

• Commercial Real Estate do not guarantee any returns. However, the probability of negative returns are medium.

• The returns from Commercial Real Estate depend on the location of the property, economic growth, etc.

• However, Commercial Real Estate investments typically have lower returns as compared to other investment options such as debt and equity. However, Commercial Real Estate have higher rental returns as compared to Residential Real Estate.

• It is also to be noted that unlike debt and equity investments, real estate investments involve significant operating and maintenance costs. This further pushes the returns below those of debt and equity. These costs also depend on the lease arrangement that owners have with their tenants.

Risk Level

• Commercial real estate is a high-risk investment.

• Commercial Real estate investments come with risks such as poor location risk, failure to pay rent by the tenant, and other issues.

• It is always worth doing thorough due diligence on an individual property under consideration. Every property comes with its own unique risks.

Liquidity

• Commercial real estate investments are relatively illiquid as compared to debt and equity investments.

• Investors can decide to sell their investments at any given time, but there is no guarantee of a sale. This is because investors (buy side) will have unique requirements, that the property may not be able to fulfill.

• The illiquidity constraint may also come into play because at any given time, not everyone will have funds ready to deploy into a real estate investment.   

Interesting Facts

• Commercial Real Estate investments have the characteristics of both debt and equity investments. Like an equity investment, when an investor purchases Commercial real estate, the investor owns that property. In equity investments, investors own part of the company. When investors receive rental income, this is seen like interest income in debt or dividend income in equity.

• Commercial real estate can be used as a collateral against a mortgage taken.

• Real Estate investments are considered as a good hedge against inflation. This means that in an inflationary environment, as prices rise all around, real estate prices also generally increase in line with inflation.

• Real Estate investments have a low correlation with equity and debt investments. This is why it is a good investment option for diversification.

Tax Implications

• Eaarnings received from Commercial Real Estate are taxable.

• When investors sell commercial real estate, the difference between the Sale Amount and Purchase Amount is typically called “Capital Gain” or “Capital Loss” (if sale amount is lesser than the purchase amount).

• The tax that investors must pay is -
• Situation 1 – If the property is sold within 2 years of buying, the investor must pay tax on Short-Term Capital Gains (STCG). This short-term capital gain is added to the taxable income of the investor and tax is to be paid according to the tax slab.
• Situation 2– If the property is sold after 2 years of buying, the investor must pay tax on Long-Term Capital Gains. There is a new flexibility in calculating long-term capital gains (LTCG) tax on real estate. Investors have two tax options for property bought before July 23, 2024:
• New Regime: A 12.5% LTCG tax rate without indexation benefits.
• Old Regime: A 20% LTCG tax rate with indexation benefits.

• There is no tax in case of “Capital Loss”.

• Any rental income that investors receive from Real Estate investments is added to their taxable income and they need to pay tax according to their tax slab.

Where To Invest

• https://www.propreturns.com/

• https://www.99acres.com/commercial-property-in-india-ffid