There are plenty of eye-catchy stories about investment in real estate made. You will get millions of rags to riches stories on the internet about real estate investors. However the method of earning passively from real estate is not new, it has been used for a long time. Earlier people used to generate real estate income by lending the property for rent or agricultural land for cultivation in exchange for money or goods. But today's investments are leasing, rentals, and real estate investment trust (REITs).
Real estate investment is based on a simple methodology. It involves buying a property and holding it till the time of price appreciation. In the last decade, the property rates showed an increase of around 38 percent across the major 7 cities in India.
To make it more clear, let’s take the example of the Taj Mahal. At the time when it was built, in the year 1653, the cost was about 32 million rupees. If you consider this in the year 2015 it was around 52.8 billion rupees. That is 70 billion rupees in the year 2020.
Where the traditional method was restricted to construction and using the property for commercial or residential use. The modern approach is to start with a low real estate investment in such a manner that it gives high returns with minimal effort.
Let’s understand more about how you can invest in real estate to generate long-term wealth.
In This Article
1.3 Vacation Rentals
How to make an Investment in Real Estate in India 2021?
The first step to make an investment in real estate is deciding whether you want to start with a short-term rental strategy or you want to buy a real estate property for the long-term.
This is solely your decision. But before making a choice, you should always consider your financial condition, the market condition, and your financial goals.
You can invest in real estate mainly in 3 ways:
- Firstly, Residential Rentals
- Secondly, Commercial Real Estate
- Thirdly, Vacation Rentals
1. Residential Rentals
As the name makes it clear, it involves earning passively through rentals. It is an ideal choice if you have enough capital to finance maintenance costs and bearing the loss of vacant period when your property will be idle.
You can start the residential rentals if you have good renovation skills and a huge amount of patience to deal with the tenants. Where it seems quite easy, you may have questions popping up in your head like:
- First, if the tenant does not pay rent on time?
- Second, what if they damaged our property?
- Third, if they ran without paying the rent?
- And so on...
This may sound funny, but it happens. For this, you always have to make sure you take 1 or 2 months rent in advance as security. This will help you to safeguard against any such losses.
2. Commercial Real Estate
When you gain enough experience and have a good amount of capital to invest, you can consider Commercial Real Estate.
It involves, dealing with companies for a longer time horizon usually more than 10 years. Where it can give you bigger profits, it also requires more risk-taking ability.
The biggest advantage here is that the cash flow is steady as there are no short-term changes in tenants and the returns are also high as compared to residential real estate.
Here the most ideal approach is to buy a hot property at an upcoming marketplace when the market is down. Then you have to hold it till capital appreciation and wait for the right time to lease it. Then you just have to sit back and relax to enjoy your profits.
3. Vacation Rentals
If you are willing to take higher risks and want to start with minimal investment, vacation rentals will be a suitable choice for you. It involves renting out your property to a tourist and an alternate to a hotel on a temporary basis.
As compared to residential or commercial rentals, vacation rentals are an easy option and require much less supervision and expertise. There are many online platforms like Airbnb and VRBO. They can facilitate the booking and will take care of the lending process.
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Pre- Investment tips to start an Investment in Real Estate in India
1. Gain Market Insight
There are various types of deals in real estate markets of all sizes. Therefore, before you start investing, the first and foremost step is to compare all the deals you get.
You have to compare various factors such as:
- Firstly, the demand for the property
- Secondly, the location of the property
- Thirdly, the rental rates
- Next is the purpose of the Investment
You can easily find these insights from the research reports of real estate investment firms.
You can also refer to industry bodies like CRISIL and FICCI. To find the local property market details you can also check online portals like Magic Bricks or 99Acres.
2. Seek expert Guidance
In case you are unsure about any deal, never hesitate to seek expert advice. Take professional advice from somebody who is not a part of the deal. This will help you to get an unbiased review of the deal.
You can consult a real estate lawyer or any reputed property consultant. This will help you to know about the pros and cons of the property you are looking to invest in.
3. Keep Realistic Expectation
Most people make the mistake of expecting an unrealistic amount of return. This often traps those people into suffering huge losses.
You should know that real estate is not an overnight money-spinner. The best approach is to keep a steady cash flow from your investment in real estate, rather than expecting a huge capital appreciation.
4. Focus on Location
In real estate, location plays a crucial role in deciding the returns on a certain property. A good location that has access to various amenities and infrastructure can be a great investment.
Look for a property that has good connectivity and good transportation. In real estate, return depends directly on these factors like the property at a good location enjoys high rentals and high gains on selling.
For example, you have two options:
A – A property that has a hospital, school, and a supermarket nearby. The nearest metro is just 15 mins away. The price of this property is Rs. 30 Lacs.
B – A property that is located on the outskirts of the city. The nearest market is about half an hour away. No Public Transport nearby. But the price is just Rs. 12 Lacs.
Which one will you choose to invest in?
5. Invest during the Project Launch
At the time of project launch, the prices will always be 10-20 percent lower than they will be after project completion. Therefore, it can give you a higher return.
But, for a person with low risk-taking ability, it is not advisable to invest during project launch as there are chances that the project may not receive a favorable response.
Therefore, you must always check the following approvals before investing in property during project launch:
- Approval of building plan
- Conversion certificate of agriculture to non-agriculture land
- Encumbrance certificate
- Commencement certificate
- Khata certificate and khata extract
It is always advisable to look for a project approved by a reputed bank. Also, look for the past records of the developer or builder for any similar project launch and completion.
6. Avoid Oversized Property
The smaller size properties are always in more demand as compared to a larger size property. Also, they are often better valued in terms of returns for the investor.
A 2BHK is always considered above 3BHK because:
- The lesser amount is locked in one property.
- Easy liquidation.
- More number of buyers.
Post Investment Tips to Manage Real Estate Investment in India
1. Check your tenants
To be assured that your property is going in the right hands, it is always important to know the background of your tenants.
You must always get a police verification done for your tenants and ask them for the basic details like education, employment status, family details, permanent address, a local reference, etc.
2. Keep extra money for maintenance
Real estate investment comes with a lot of maintenance costs like repairs, renovation, upkeep, and municipal taxes. Therefore, you must always have extra money kept aside for these expenses.
3. Money Management
Money management can be a hectic task in real estate as it also involves some vacant periods. Due to this, there will be uncertain cash flows. You have to be very careful while making a note of all expenses, profits, and reinvestments. You must track all these components carefully to be a better real estate manager.
Different Ways of Investment in Real Estate
1. Buying a Property as Sole Owner
Being a sole owner of a property gives you the flexibility to make all the decisions regarding investment, tenants, location and management, etc.
As every coin has 2 sides, sole ownership also comes with certain disadvantages. As you have the flexibility to make solo decisions, you also are solely responsible for everything such as repairs, upkeep, etc. Thus, you may have to hire a property management company as well. In short, it will be time-taking as well as costly for you.
2. Buying a Property in Partnership
Buying a property in partnership means that both profit, as well as cost, is distributed among the partners, resulting in a decrease in expenses per head.
The risk of investment also lowers as the cost is distributed amongst the partners.
A disadvantage here is that the partnership fully depends upon the relationship among the partners, their future goals, and legal laws.
The process of the partnership will involve:
- Establishing an agreement that is clearly written to each of the partners
- Make sure to decide in advance about the allocation of expenses, profits, and responsibility for each partner.
- Prepare an exit plan for the circumstances such as death or the voluntary exit of a partner.
3. Sub-Rental Investment
Sub-Rental investment means that you invest in a large property, like taking a building or a property on lease, and then give each unit on rent to another party.
This kind of renting is quite trendy in Metro Cities like Mumbai, Chennai, Delhi, Bengaluru, Hyderabad, etc. This business model is based on the model of a service apartment.
A drawback here is that you need to have connections with the corporate companies to give your property for rent or accommodation.
4. Commercial Property as OYO Hotels
If you have a commercial property at a suitable location or you can develop one, then a tie-up with OYO hotel can give you great returns.
You can do a long-term agreement with OYO Rooms if you have basic standards and amenities for the hotel and can invest in upgradation and training staff.
It will be beneficial for you as you can run your hotel business more efficiently through app and technology. You will also enjoy the benefit of brand building which would require significant cost and marketing otherwise.
5. Real Estate Investment Trust (REITs)
Real estate investment trusts are similar to mutual funds. However, the only difference is the investment here is done in real estate only. Thus, the investment trust invests all the funds in different types of properties and you can buy units or shares.
In Real estate Investment Trust people pool in their money to be invested in creating a portfolio of different types of property. REITs collect the rent from leasing the property and distribute it among the shareholders.
Real estate Investment Trusts are best suited for investors who do not have much capital to invest but who also want to have exposure to real estate without a traditional real estate investment.
Moreover, with the help of Real estate Investment Trusts, investors can buy non-residential properties like an office building or a mall, which is not feasible for an investor to purchase directly.
Managing real-estate properties is very much a hassle. And having it professionally managed including tenants and rental income will definitely be a real-time advantage, which gives u all the benefits of real estate investments without getting much into to process.
You can do this through Real estate Investment Trusts. Investing in REITs will give you a steady dividend income and capital appreciation. It gives the advantage of diversification and liquidity, which reduces the risk of investment. They have more transparency as compared to the traditional real estate investment as they are being monitored by SEBI.
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