Is Investment in Commercial Property a Viable Option ?

Owning commercial space is assuming importance even among retail investors.  Investors look at acquiring commercial property by availing bank loans and letting out the property on long lease. One makes such investments with any eye on rental income taking care of EMIs and capital appreciation of the property leaving you with a handsome return on investment made.

However, one needs to validate if this strategy of acquiring commercial property by availing a loan, makes a viable Investment option.

Let us consider an example in the backdrop of the following:

An Investor bought ready-to-let Commercial property partly funded by bank loan.

EMI of the loan is adjusted against the monthly rent.

Let us quantify the strategy with some numbers:

Property Value

5.0 crores
Loan Amount 3.5 crores
Margin Money 1.5 Crores
Rate of Interest 10%
Assumed Rental Yield 6%
Annual Rental Income 30 lakhs
Average Annual Increase 5%
Capital Appreciation (annual) 3%
Loan Tenure 10 years

With the above assumptions, Return on Investment on Commercial Property is shown in the grid below:

Dates Yrs. Rental Income EMI Net Cash Flow
Apr-19 Initial Investment (1,50,00,000)
Mar-20 1 30,00,000 30,00,000
Mar-21 2 31,50,000 31,50,000
Mar-22 3 33,07,500 33,07,500
Mar-23 4 34,72,875 34,72,875
Mar-24 5 36,46,519 36,46,519
Mar-25 6 38,28,845 38,28,845
Mar-26 7 40,20,287 40,20,287
Mar-27 8 42,21,301 42,21,301
Mar-28 9 44,32,366 44,32,366
Mar-29 10 46,53,985 46,53,985
Mar-30 11 Sale Consideration 6,71,95,819
Mar-30 11 Bullet Payment (3,60,19,366)
XIRR: 6.87%

Observations:

  1. Return on investment works out to 6.87% per annum.
  2. Risk-return is not very attractive if one considers expenses like property taxes, periodical maintenance of the property etc.,
  3. Non occupancy of the property for prolonged periods may further lower the returns.
  4. On the flip side, capital appreciation of the property beyond historic average may leave one with some handsome gains.

While such opportunities seem lucrative, one need to weigh the options with abundant caution

One Reply to “Is Investment in Commercial Property a Viable Option ?”

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.