Friday, August 31, 2012

What is your ‘Real’ reason for investing in ‘Real Estate’?

This article is also published at the site of Myiris.

Buying a property or investing in real estate attracts more emotions than any other type of investment. The pleasure of living in one’s own home is immense. However ‘Investing in real estate’ is different than ‘buying a house to live in’. Both calls for different types of need analysis. Investment in real estate should be taken as any other form of investment options available in the market which should be looked at critically.
Explore and identify the ‘Real’ reason, as Real estate investing involves large amounts and is illiquid in nature. It may take you several months to realize the gains from these investments.  
Here are some reasons and suitable ways of investing in real estate.
1. To ‘live in’ at a later stage of life:
Needs change with life stage. ‘Later stage of life’ implies around and after retirement. Some may want to live at a quiet place away from the hustle and bustle of the current life. Some may be interested in living near their friends and relatives. Some may be interested in living near their grown up children. Religious places are also preferred for buying retirement homes. Overall you need a maintenance free, senior citizen friendly home with all basic amenities. Safety and security are also one of the concerns.
Consider the following points before taking a decision:
·         The property chosen should have a hospital in the vicinity as the need for medical assistance increases with the age.
·         Facilities like shops, parks, yoga and meditation center, club houses should be at a convenient distance.
·         Find out if the demographics of the other buyers is same as that of yours since after retirement you will have more time to spend with likeminded people.
·         Avoid higher floors and duplexes as climbing stairs will be inconvenient.
·         Keep the option of having tenants open if you decide to go for an independent house. It will be helpful if you are living alone.
·         Generally prefer to finalize the house closer to a city or a town as medical or other kinds of assistance may be available sooner. Retirement homes, nestled amidst greenery, away from city, may be inconvenient in day to day life.
·         Also in the course of life, you must have grown used to a certain lifestyle hence choosing a place very different from the current home may seem uncomfortable after sometime.
·         Size and layout of the house should be such that the maintenance and movement is easy.  
Gated condominiums around city will be the most suitable choice if above points are taken into account.  If you do not have immediate need, you can save on cost by choosing an under construction property which are usually priced lower than ready to move in properties. Apart from apartments, options of flexi homes and plots are also available within some condominiums.
2. To have a quiet stay once in a while:
Everyone aspires for a ‘Quiet stay’ once in a while. That means getting away from all the noises, traffic jams, ringing phones and daily struggles of life. Nowadays, this need arises more often than you think. And if your budget allows you can own a vacation home. You don’t necessarily have to expend in hotel bookings every time. Also, these homes can be let out to others when you are not using them, yielding some kind of secondary income for you.
Properties away from the city, easily drivable, are good options. Another option can be buying an agricultural land and then constructing a vacation home of your choice. You can be as creative as you wish to be. The other options can be buying property at tourist places like near beaches on hill stations or wild life reserves. Ensure to get all the necessary government clearances and approvals before making such an investment. After your vacation home is ready, a little investment into keeping a care taker is extremely useful.
As much as possible, try avoid taking loans for such a thing as they are lifestyle choices and not very sound investment options. It would be difficult to let it out for long continuous periods or to sell it out.
3. To generate regular income:
‘Rental income or income from lease’ qualifies for the ‘regular income’ from your real estate investments. You should not get lured by ‘Assured 12% returns on your investment in so and so property’ advertisements. They are just promotional in nature and don’t generate regular income forever. These can yield certain amount only initially till the time of possession and not afterwards. Investing into land is also not a good option as it will yield any regular income only when some construction is done.
You can buy a residential apartment/ floor/town house in tier-I or tier-II city which sees higher influx of people due to job opportunities. If you don’t ever plan to use it for your own use, then layout or number of rooms can be looked at very differently. A small 2 or 3 bedroom house would be a very good option. You can think of investing in service apartment, but ensure its nearness to the market place and/or business centers. Also arrange for a reputed service provider to maintain your service apartment.
Investing in a commercial property like a shop in a mall or office space can also be looked into. In general they are more expensive than residential properties therefore learn in advance about the companies interested in setting up a shop there. Since commercial properties are more often rented on per square rate, invest in smaller area(s). They can be rented easily.
4. To earn quick profits:
‘Quick profits’ can be earned through trading in real estate.
Invest in prelaunch offers and sell them once the property appreciates. You will be required to shell out only 5 to 10% of the value of the property hence it will allow investment in more than one property at a time provided your budget allows it. But realizing money from real estate takes time. The waiting period is usually 4 to 6 months in real estate trading.
Invest with a reputed builder only or you may lose both time and money if the builder delays the construction or does not start it all!
5. To get a lump sum amount:
‘Lump sum amount’ is the capital gain from the property earned on its sale. Generally people tie their goals like education or marriage with such investments. Therefore availability of money at the right time gains a lot of importance. In such cases you should not keep waiting to get the best price for the property. Instead you should sell it at least a year before to keep the money ready for the goal.
Following points can of help:
·         If your time horizon is 5-6 years, residential apartments in and around city are more suitable than plot or any commercial property, as the apartments get sold easily.
·         If your time horizon is 8 to 10 years than invest in an area far from a city, provided the city has expansion plans on the horizon. Tier-II cities can serve the purpose better because of the lower property rates in comparison to the tier-I cities. Areas near industrial belts are also good option as they attract various commercial activities later.
·         In case your time horizon is more than 10-12 years, explore investing outside the country as well.
Apart from investing as an individual, consider forming a group. Your group can buy a land and develop it with the help of a builder. If you have constructed apartments, profits can be made on the sale of each apartment.
Real Estate Investment Groups are one more way of group investing. They are usually set up for rental properties. While an investor may own one or more units, a professionally managed company acquires, builds, maintains and lets out all the units on the properties in exchange for a percentage of the monthly rent. You can sell off your units once they are ready.
6. To diversify the investment portfolio:
‘Diversifying investment portfolio’ implies investing in different types of investments like Shares, mutual funds, bonds, fixed deposits, gold, property. You may be unwilling to commit large amount to one particular class of investment.
REIT (Real Estate Investment Trust) gives you an opportunity to invest small amounts in real estate. REIT is a company that invests in real estate. REITs trade on all major exchanges. They use investor’s money to acquire and operate properties. They are highly liquid and you get exposure to both residential and commercial real estate investments.
Real estate investment is a commitment of large amount of money for duration much longer than most of the other investment options. Most importantly, if you are planning to take loan for the investment, make sure that EMIs should not become a burden in future.
Do not hurry; invest only when your real reason and requirements are fulfilled!
(You may want to look at my earlier written article ‘Road to buy your dream house’ on the blog for need analysis of buying a house to live in)


  1. This is a nice article. I would request write article to put in capex and ROI wrt who are investing in property from money doubling perspective. Also property for rental assured sum is a loss proposition. ( consider 50L worth property giving a rent of 20 to 30 Thousand a month ).

    Comparision of money from investment perspective would be good article to have it on blog. monday toi has many articles for investors.


  2. Thank you for appreciating the article!

    The objective of the article is to divulge deep into the ‘psychology’ when some one is planning to buy property from the investment point of view.
    Aspects like ROI, Tax implications call for separate articles. Anyways thanks for highlighting them!

    I feel that any investment is a good investment if it can give you a Good Night's sleep!


  3. I liked the article :-) have just invested in a project in gurgaon, diplomatic greens sector 110. do you think it is a good investment? Can you pls advise on how and what are the areas one can invest in property abroad..and the kind of funds avail, i would be interested in small houses villas, with good rental and cheaper costs . what countries can we look at with a long term time horizon.

    Lt Col AS Bedi

  4. Thank you Arjan!

    I will not be able to comment on a particular property, but Gurgaon is a growing city which is seeing a continuous influx of people due to various job oppurtunities. So it fits the bill as per the point no.5 above "To get the Lumpsum amount". If this is your reason for investment than you can wait and watch over the property prices.

    Also to answer your second question- Investing abroad calls for a lot more deliberation than investing in ones own country. Few points to consider before investing are:
    1. Financial and political situation of the country
    2. Tax implications
    3. Legal issues
    4. Country's political relationship with your own country
    5. Distance/ travel time
    6. Your own cognizance with the country.

    Seek advise from Indian embassy (if possible) in the country before taking any decision.
    You can start your search by contacting any reputed real estate advisor in India who also helps in investing abroad.

    In all cases 'define your long term as to for how many years you want to stay invested?'

    Good luck with your search!