Real Estate as an Investment

The entire discussion is based on investments made after 2010. So please don’t focus on the properties you bought before 2010.

Real Estate – Market Size:

          The total market was around 12,000 crores in 2019 (as per IBEF, An Initiative of the Ministry of Commerce and Industry, GOI). It shares about 13% of the nation’s total GDP, and the industry’s growth has declined very sharply since Q2 2019. Except for a few cities in India, many cities and rural areas have an average growth of 2-4% as the years go on.

Reference: Global Property Guide 

Mumbai and Pune are the largest contributors to the real estate market in India, accounting for 31% and 21%, respectively.

In addition, home pricing is declining even in major cities like Mumbai, Bangalore, Chennai, Delhi, Ahmedabad, etc.

 Ways of Investing in Real Estate:

Many ways have been followed in real estate for many decades. The most common are,

1. Renting a home.
2. Retail buildings.
3. Commercial property.
4. Hospitality – Hotels.

          Another important way of investing in real estate is through REITs (Real Estate Investment Trusts) and InvITs (Infrastructure Investment Trusts), mutual funds, and ETFs.

Middle-class people most commonly invest in renting a home and retail buildings. Only corporates and big investors can manage commercial properties and hospitals like hotels, resorts, etc.

Thus,  many people dive deeply into investing in renting a home and retail buildings.

Why We Should Not Invest Over Rental Home:

          Most people in India have the habit of investing in more houses so they can earn some rental yield. Building a home for a rental is not much needed as it yields only limited returns. Building your own home is a consumption and not an asset. People think investing in renting a house or retail building can generate a comfortable interest. But the reality is even worse.

Rental Yield:

          This is an important parameter to consider before building a home or retail shop for rent. Every investment should have some amount of return. So, the return is calculated by the capital yield per year divided by Total capital on Investment. In the same way, rental yield should be calculated,

Rental yield = (Total Rent Collected – Maintenance Charges)/Total Investment on building

        As we all know, a good investment should yield a minimum 8% return to keep up with inflation. These investments have a major share in our total asset allocation. We should look for a return of 10+% per annum.

In reality, after 2010, houses built for rent yielded a maximum return of only 4%, which is equal to the bank’s return. In some cities, the return on investment was even worse, accounting for less than 3%.

For example, to build a 2bhk house in Metro Cities, we should spend a minimum of 50 lakhs. The rent for the same house in a Metro City will be Rs. 1.8 Lakhs (excluding Maintenance and Water Charges) for a year, so the Rental yield is just 3.75%.

Now, we must understand that investing in rental houses cannot be wise. This is because people fail to calculate the ROI, know about Inflation, and think that investing in real estate is safe and can yield a good return.

How to Choose the Investments in Real Estate:

          Even now, there might be few properties that can yield super or multi-bagger returns. But there are only a few. Here are the basic ideas to find the right property.

1. Buy when price depreciates — Property prices fluctuate, appreciate, and depreciate like the share market. It is always our basic responsibility to buy the correct property at a cheaper price before the demand starts accumulating.

2. Choosing the Location—This is the most vital part of investing in property, as not all properties will yield benefits. Some properties might be chosen for infrastructural development, such as colleges, schools, 200-ft roads, 400-ft roads, new industries, government bus stands, airport extensions, etc.

You can’t buy the properties after the news has been announced; you have to plan before the market price moves up. For example, buying a plot outside the developed city will yield a good return in the future because that’s the future place for development. Don’t go and buy a place in the market crowd, as promoted by real estate brokers.

The current market is highly priced, and investments made after 2010 yield only 3-4%, so it is better to avoid investing. We can wait for the correct time and price for the property and always buy and sell plots, not buildings or rent. So, as per the investors and analysts, investing in property for the next 3-5 years should be avoided. After 5 years, if the price is nominal, we can start our investments with more caution and in a growth mindset.

Demerits of Investing in Real Estate:

1. No Perfect Valuation: Unlike the stock market, where the current stock prices are known, real estate doesn’t have a perfect value. The cost will be varying individual to individual. No one will sell an exact ideal value, and we have to bargain a lot to auction them.

2. No Liquidity: This doesn’t mean we can’t sell the property. This means that in an emergency or any necessary circumstances, like our children’s marriage, investing in a business, etc., we can’t liquidate all of a sudden. We have to either keep them unsold or sell them for a lesser or cheaper price as demanded by the buyer, as we are in need.

3. Maximum position in Asset Allocation: While you invest in real estate, the maximum asset is allocated only here, which yields only a 3-4% return after 2010. So, we will have less exposure to equity, bond, and fixed-income instruments, which produce more than 7% return (minimum).

4. Emotional Attachment: People don’t have any emotional attachment to gold compared to properties or plots. People segregate their plots in their children’s names and keep them on an emotional basis. They don’t think about the return or the asset management and never use those, even when they need an emergency. So, this can be an investment in foolish material.

Things to Avoid While Investing:

Investing in Plot or Home with Loan: I have heard many people getting a plot for personal loans at high interest. Even though we don’t promote a home loan, a personal loan is too high, with an interest rate of more than 12% P.A., where the return of plots is moving on 3-4%. It is a blender mistake that should be avoided. Never live for others. A debt-free life is more important than satisfying others.

Investing in a Plot on Hearing Elder’s Advice: When we start our careers and earn some thousand per month, our parents or some known older people or relatives urge us to buy a plot, saying this is a real asset that will appreciate like anything. They make us emotionally attached to owning a plot or home to have a happy life. This becomes the main reason for all kinds of loans.

Buying a plot under promotion and offers: We all might have undergone this experience. In some channels, a well-known person (film industry) will promote a flat, saying the plot is located near a hospital, a school, and a college and is near the city. Also, they provide offers like gold coins and even a car. The reality is the plot will be somewhere 80 km from the city. People even invest there for a car or gold coin.

Conclusion:

• We all know that real estate was once a multi-bagger investment instrument, but we are currently trying to understand its reality.
• The return on investment over real estate is between 3-4%, and the rental yield is a maximum of 3% in major cities.
• Never invest in homes or retail shops for renting purposes.
• Don’t get emotionally attached to the properties; don’t be fooled by promotions and offers. Never buy on other’s advice.
• Before investing in real estate, be cautious about asset allocation. Your maximum asset allocation should be 20% of your total assets.

Wait for the correct time, place, and value to invest in properties or plots.

This subject is completely taken from a practical sense from most successful financial leaders, my mentors, and myself.

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