Manu Nedunkandathil, CFP
Real Estate Investments
Updated: Aug 20, 2021
One of the asset classes which has proven to be a wealth creator in the long term is Real Estate. With land being a finite commodity and an ever-growing population, real estate will continue to grow in value in the years to come. Today, be it a common investor or the rich and the wealthy, Real Estate investment is a priority for everyone. Be it a parcel of land, an apartment, or a commercial space, everyone is looking to own a piece of the pie.
And why not?
Unlike any other asset class "Real Estate" gives a sense of safety and surety. It is tangible. You can see it and feel it and flaunt it. And if you can hold it for long, the returns can be astronomical.
But, is it as simple as it seems?
Many of us are first-time buyers of Real Estate. All of us need a roof above us and there is always a lot of emotions attached to it when one is buying Real Estate for personal consumption. In such cases, emotions and personal preferences override any other considerations.
However, if one is looking at buying Real Estate purely as an investment, then there are some factors that need to be considered.
Real Estate Investment: Things to be considered
Identifying the right property
Properties within a city don't have identical growth rates. Two properties under different locations within a city may grow at a different pace. It all depends on how the future development in the area pans out. Not everyone is capable to correctly predict the same. So, if you are one of the select few who has a penchant for identifying good properties with chances of higher appreciation, then you must not hesitate. However, if you don't have the necessary skills to identify good properties, then the selection must be left to experts. The cost will be worth it.
Verifying the antecedents of the property
Verifying the legal documents of the property need not be stressed any further, what with all the property dispute cases dragging on in Indian courts for years together. It will be worthwhile investing in investigating the property antecedents to find any wrongdoing by the seller.
If it is an apartment purchase, then the antecedents of the builder need to be checked. Questions like: -
How many successful projects the builder had delivered?
Have the projects been delivered on time as per promised schedule?
Whether all the necessary approvals are in place for the construction and has the builder done any variations from the approved plan?
Investing time and money in carrying out due diligence on the matters above will save you a fortune in the future.
Though Real Estate is an asset class that can create wealth in the long run, it is not a liquid asset. One cannot carry it with self in case of migration neither can he dispose of it immediately in case of any emergency.
More often than not, in times of distress sale, the property in question never fetches the market rates. This is a huge drawback with respect to real estate.
If you are looking at generating regular income through rental income by investing in Real Estate, then, Rental Yield is an important factor to consider. Rental Yield is nothing but the rate of return received from the rental income of the investment property. Rental Yield can be further drilled down to Gross Rental Yield and Net Rental Yield.
Gross Rental Yield only accounts for the rental income received from the property for calculating returns, whereas Net Rental Yield not only accounts for the income from the property but also accounts for the expenses incurred to maintain the property like taxes, maintenance expenses, etc.
Net Rental Yield can be calculated as follows: -
Net Rental Yield = ((Annual Rental Income - Annual Expenses)/Purchase Price) X 100
Net Rental Yield is a good measure to compare Real Estate investment with returns of alternative investment options like Bank FD, Stocks, Mutual Funds and Gold.
If the Net Rental Yield from the property is less than even the risk-free return, then probably an alternative investment option may be considered to better utilise your investible surplus.
Encroachment and land grabbing
Last but not the least, Encroachment / Land Grabbing is a serious concern when it comes to investing in Real Estate. Especially if the investment property is away from your usual place of residence or city. These take the form of civil disputes and can drag on for years in courts draining your precious resources, time and money.
Property disputes are nothing new to mankind. Disputes related to property have existed since the time man settled down into small villages from being a hunter-gatherer. Disputes will continue to arise long after we are gone. Indian courts are a testimony to that fact.
Especially, since the land records to a larger extent are still not computerised, the chances of records being fudged cannot be ruled out. There have been many cases where the owner of the property had lost the ownership of the property or had to sell it below-market rates to corrupt individuals or cartels due to lack of physical presence on-site coupled with lack of clout in the power corridors.
Hence, if you are looking to invest in a property far away from your domicile then ensure arrangements are made for keeping your men there or ensure regular visits to stamp your ownership.
Real Estate as a wealth creator cannot be disputed. In line with the basic rules of investment as a matter of diversification, Real Estate as an asset class must find a space in your investment portfolio. However, one may consider the above points before investing in Real Estate.
After all, it is always better to be safe than sorry.