REAL ESTATE AS AN INVESTMENT
Real estate was the top priority when it comes to investment by our ancestors. Even many people above age 40 will still focus and recommend real estate as the best investment option because they might be benefited from real estate. It’s absolutely true. There was a period in India, investments done over real estate that yielded 10 times of profit in 1 year. Those days are gone, now the market is in high value as in most of the metro cities there are many flats which are still unsold. Most of the land values are depreciating.
The complete discussion is based on investments done after 2010. So please don’t put your mind 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 Ministry of Commerce and Industry, GOI). It shares about 13% of the nation’s total GDP and the growth of the industry has been declined from Q2’ 2019 very sharply. Except for a few cities in India, many cities and rural areas have a growth on average 2-4%, as 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 to this, even home pricing is in a declining position in major cities like Mumbai, Bangalore, Chennai, Delhi, Ahmedabad, etc.
WAYS OF INVESTING IN REAL ESTATE:
There are many ways that were 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 REIT’s (Real Estate Investment Trust) and InvIT’s (Infrastructure Investment Trust). These are a type of mutual fund and ETF.
The most commonly invested areas by middle-class people are, renting a home and retail buildings.
Only corporates and big investors can look after commercial properties, hospitalities like hotels, resorts, etc.
Thus, many people take a deep dive into the investments are done, on renting a home and retail buildings.
WHY WE SHOULD NOT INVEST OVER RENTAL HOME:
Most of the people in India have the habit of investing in more houses as they can earn some rental yield. Actually, building a home for a rental is not much needed as it yields only limited return, building an own home is consumption and not an asset. People think investing in renting a home or retail building can yield them a comfortable interest. But the reality is even worst.
This is the important parameter which we all should have in our mind before building a home or retail shop for renting. 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 move along 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, the houses built for rent yield a maximum return of only 4%, which is equal to the return of the bank. In some cities, the return on investment 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 of the amount. 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 investments in rental houses cannot be a wise investment. This is only because, people fail to calculate the ROI, knowledge about Inflation, and their thought process like, investing in real estate is safe which can yield them 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. Hereby we are sharing the basic ideas to find out the right property.
1. Buy when price depreciates – Like the share market, even property prices fluctuate, appreciate, and depreciate. It is always our basic responsibility to buy the correct property at a cheaper price before the demand starts accumulating over it.
2. Choosing the Location – This is the most vital part of investing in property, not all the properties will yield your benefits. Some properties might be chosen for infrastructural development like colleges, schools, 200ft road, 400ft road, new industries, government bus stand, airport extensions, etc.
You can’t go and 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 have done after 2010 are yielding only 3-4%, so better avoid investing currently. We can wait for the correct time and the correct price for the property, always buy and sell plots, not a building or rent. So, as per the investors and analysts investing in property for the next 3-5 years should be avoided and after 5 years if the price is nominal we can start our investments with more cautious 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 price will be varying individual to individual, obviously, no one is going to sell in exact perfect value and we have to bargain a lot to auction them.
2. No Liquidity: It doesn’t mean, we can’t sell the property. This means at the time of emergency or at any needed circumstances like our children’s marriage, investing for 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 be having less exposure to equity, bond, and fixed income instruments which yields more than 7% return (minimum).
4. Emotional Attachment: People don’t have any emotional attachment with gold when compared to properties or plots. People segregate their plots in their children’s names and they keep them on an emotional basis, they don’t think about the return, the asset management, and never use those even when they need like an emergency. So, this can make the investment as 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, but 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 really a blender mistake that should be avoided. Never live for others, debt-free life is more important than satisfying others.
Investing in Plot on hearing Elder’s advice: When we start our career and earn some thousands per month, our parents or some known elder people or relatives urge us to buy a plot saying this is the real asset, which will appreciate like anything. They make us emotionally attached to own 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 be promoting flat saying the plot is located nearby a hospital, a school, and college and it is near to the city. Also, they provide offers like gold coins and even a car. The reality is plot will be somewhere 80Kms from the city. People even invest over there for a car or gold coin.
· We all know that real estate was once a multi-bagger investment instrument, but currently trying to understand the 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-home or retail shops for renting purposes.
· Don’t get emotionally attached to the properties, don’t fool by promotions and offers. Never buy on other’s advice.
· Before investing in real estate, be cautious about asset allocation, it can be of 20% maximum in your total asset.
Wait for the correct time, correct place, and correct value to invest in properties or plots.
This subject is completely taken from a practical sense from most of the successful financial leaders and even from my mentors and myself.
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