Is real estate a good mode of investment?
The best investment on Earth is……EarthLouis Glickman
Louis quoted these words about 60-70 years ago. Are these words true for today as well? If you are a first-time investor then you would surely have plenty of queries about it.
- Is it really profitable?
- Am I going to make money from it?
- Is it worth the effort?
- If there are so many people doing it, should I start too?
What is Real Estate?
In the term ‘Real estate’, real means actual or genuine and estate refers to the Land. Real estate is the property, land, building, air rights above the land, and underground rights below the land. For the real estate domain, initial capital is a must. Unlike stocks and mutual funds, real estate investment is a hard tangible asset that comes with the minimum risk. Additionally, it is adulteration free and provides a zero fraud guarantee compared to gold investment.
Types of real estate
Residential real estate includes both new construction and resale homes. These are mostly single-family homes like townhouses duplexes etc
Commercial real estate includes shopping centers, malls, medical and educational buildings, hotels, and offices.
Industrial real estate includes manufacturing buildings and property as well as warehouses. These buildings can be used for research production storage and distribution of goods
Land typically refers to undeveloped property and vacant land.
Why Real Estate?
In the real estate domain, area, location, and type of property are the most important aspects. Initial capital is a must for this type of investment.
In India, rental returns and capital appreciation are the two benefits of purchasing a residential property.
Let’s talk about rental yields first. Based on the percentage of rent associated with its price, any property can be classified into rental or a buying opportunity. The following table would make it more clear to the readers,
|Residential Property||Commercial Property||Type|
|less than 3%||less than 5%||better to rent|
|3% to 4%||5% to 7%||can be rented or bought|
|more than 4%||more than 7%||can be bought|
Now, let’s also compare a Real Estate Investment with a Term (Fixed) Deposit.
Case1: Investment in Real estate (considering a rent of 25k per month)
Case2: Fixed deposit in Bank ( considering interest rate at 6%)
Comparing the above two cases, we can easily observe that the P/E ratio for saving in a bank is much lower which means we need to spend ₹16 to earn ₹1. So, the bank seems to be a much better option here.
But, there is a crucial fact that we have missed above.
Real estate is an appreciating asset (not liability) as it goes up in value; apart from the emotional factor of a personal home providing a sense of security and pride. To understand this much better, let us consider a general example if someone bought a commercial property in a city whose value for different years are:
So, this is very clear from this example that within 20 years, the future value of a property becomes 15 times of its initial value which can never be in the case of a fixed deposit in a bank.
For shorter durations, the price appreciation might not be significant but as you widen your horizon, you will notice that the returns will start becoming tremendous. And that is the real lucrativeness of this investment.
For eg, in the crisis year of 2008-2009, there was a huge increase in the price due to the great demand. Post that, we see modest increase due to the governement changes, demonetization, RERA, benami laws and laws on cash payments etc. Talking about today, the Covid crisis might again subdue the high appreciation.
But then, as any seasoned investor will tell, the best time to be bullish is not when the prices are skyrocketing, but when the prices are falling or stagnant. So today might be the perfect time to get into a real estate investment.
Advantages of Real Estate Investment
This is one of the main benefits of investing in real estate. Governments really like real estate investors and they treat them differently when it comes to tax paying. Real estate investors pay less tax than almost any other citizen real estate investors are called developers because they provide housing for the general population and increase its value over the course of time. Some of the tax deductibles received by real estate investors are Depreciation deduction from income, Mortgage interest tax deductions from income, Cost of repairs and maintenance, Cost of services, Travel cost associated with the property, and property tax deductions, etc.
Appreciation in value
The population is constantly increasing. People need places to do business. Most businesses are concentrated in hotspot cities. These three factors drive the demand for housing constantly plus increasing the value of property bought. Putting a fresh coat of paint, fixing the roof, interior designing, and inserting other advanced technologies could add to the appreciation of the value.
Predictable in nature
It’s hard to tell what the stock market will do from day to day real estate investment works much differently. Instead of any hustle and bustle, real estate investment is much more steady and predictable. Real estate investment covers much lower risk and is one of the safest investments you make as the value of the property rarely goes down. In India, that has happened never.
It is literally making money from money with very little effort. As a world-famous investor, Warren Buffett once said, “If you don’t find a way to make money while you sleep, you will work until you die”, spending money on quality gives us many ways to earn profit from it. By simply renting it to quality and stable tenants we may clear our remaining EMIs with the rent and enjoy the positive cash flow.
Insurance companies are active all over the world. Every piece of land can be and should be insured. Insurance companies are competing with each other to provide better rates with higher coverage. Rent from the tenant is going to cover that cost as well. Protection from property damage, reimbursement for lost items, protection from lawsuits are some of the coverages that come with the insurance.
Fairly easy access to home loans
Anywhere in this developed world, there is access to banks. Banks give credit easily if you are employed and have proof that you can pay the money back. Also, you’ve to pay a nominal amount as a down payment and have enough time as well. Read how to get a home loan from the bank of my choice
Let us understand this with the help of an example. Suppose you have to purchase a property worth ₹ 80 lacs. You pay ₹ 20 lacs as a down payment and take 60 lacs from the bank as a loan. You spend ₹ 5 lacs more to redesign and redecorate the property. Now, now you rent this to a quality tenant. Again, ask a different Bank to refinance the property by offering up to ₹ 1 crore 30 lacs by looking the property and quality of the tenant. Now, you pay ₹ 60 lacs to the previous Bank to clear up your loan, and still, ₹ 70 lacs are left in your hand. This is called Refinancing.
Alternatively, you can also get personal/business loans very easily with your property as a guarantee.
Diversification is an extremely important process for investors. In order to reduce the overall risk from different markets, many investors spread their money in different types of investments. If someone already has investments in stocks and mutual funds, investing money in real estate will help you survive any storm that the stock market is hit by.
Easily transferable to kids
When someone wants to own a property that can also be useful for his/her next generations then real estate investment is an excellent choice. These properties can be easily transferred to future generations without any taxes.
Limitations of Real Estate investment
Like all the other investments, there are some risks involved and we should be prepared for that.
Real Estate is an expensive investment, and having that kind of capital ready is not easy. You will also want to put only a part of your savings into real estate, because of the next two factors.
The real state isn’t known for being a liquid asset which means one can not sell it and convert it into cash quickly. Usually, the real estate sales process is very long. If you want to sell, you must be prepared to wait for months. As the asset value is very high, high demand in the market is required to sell it. Before investing in any kind of property, you should double check the area, location and future demand.
Management and maintenance of assets
Sometimes rental properties remain vacant for a long duration and become a headache for the investor. Maintaining and managing properties according to the demands of tenants becomes great responsibility. Getting quality tenants might be a big challenge as well.
Specialized Knowledge/Expert advice
You should have a clear idea of the worth of property, market cycle, and goal of purchase etc, before buying any property. It demands a real estate consultant who gives specialized investment and financial advice.
Real Estate is a very good investment, if you,
- have surplus capital, and
- want to diversify your portfolio, and
- have a long term (5+ years) horizon
You plan to settle and want to buy a home for your own use.
The next question is when to invest in real estate and where. If you want to invest in real estate for personal use, future market trends analysis is of no use but if you want to earn profit from your investment you must have the proper market knowledge, future demands for the property, and management skills for renting the property.
The following blogs may be of help once you have decided on investing.
Also, with the growing population, India is emerging as an important business location. Its favorable demographics and strong economic growth make the country an attractive place for property investors. In recent years, the real estate sector in India has exhibited a trend towards greater organization and transparency, accompanied by various regulatory reforms.
If all the above factors are in your favor, a big thumbs up for real estate investment from our side. If you are looking for a property in Bangalore, feel free to search within the maximum number of options.