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Investment in Real Estate

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Nowadays everyone is talking about investing in real estate.

It's very true that in India real estate sells like hotcakes.

If you are looking for buying a property you may either be buying it for residential or commercial use or you may be buying it as an investor. Since the objectives are different, the selection criteria may vary from buyer to buyer.

Let us further clarify and assess the investments.

  1. Buying for self utilization :

You must evaluate the property on the following points:

  1. Locality.
  2. Carpet Area – present and future requirement of your family.
  3. Connectivity – mode of transport, medical facilities available, malls and entertainment facilities in vicinity.
  4. Amenities – club house, round-the-clock security, garden areas.
  5. Budget – your affordability, upfront lump sum payment, and EMI.
  6. Resale valuation – your property should fetch a good resale price, in case you want to shift to another area.
  7. The promoter's or developer's reputation in the market.

My client bought a flat six years ago in the suburbs of Mumbai for 20 lakhs. It is valued at 50 lakhs today, he very happily tells me. What a smart decision he took at that time; his property is now worth 50 lakhs! But really is it so? I asked him how he would benefit by this appreciation in value. Even if he wants to encash on it, he has to find a new house for himself, which will cost the same amount or even higher. He doesn't have an answer for this. So as a rule, a residential flat is not counted as an asset!

2. As a Investor :

  1. Check why you are investing in the property. Is it for diversification of your portfolio or is it for more returns.
  2. If you are struck with the euphoria of higher returns, not for having balanced portfolio. Do note, to buy a flat as an investor you have to shell out a lump sum amount upfront, which may affect your liquidity and cash flow.
  3. People normally tend to liquidate their existing investment (done for retirement or children's education, etc.) to invest in real estate.
  4. Property selling is not an easy job; you might have to wait 2-6 months and in some cases even a year to get the desired price.
  5. Since liquidity is an issue, think twice before putting your retirement or education fund on stake. It may hamper your investment goals.

Importantly, most people tend to overlook the 'holding cost' of the property. Whenever you buy property, you have to pay property tax, maintenance charges, minimum water and electricity charges, along with extra amenity charges; these we term as the 'holding cost.' You must consider this 'holding cost' along with the EMI or lump sum payment as an outflow towards the property. What most investors tend to do is take into consideration only their investment in the property in terms of EMI. They tend to overlook the holding cost, which can skew the investment equation in the long run. Remember your total holding cost with EMI should not be more than 30% of your monthly income!

 

If you have done comprehensive financial planning and according to asset allocation if it is required to invest in real estate, then surely go for it. If not, then regular investment in equity-linked mutual funds not only gives you good returns, it can also give you liquidity.

We need to understand that the 'demand and supply' concept applies to real estate too. If the demand is more than the supply, the prices shoot up, but the moment the supply increases vis-à-vis the demand, the prices slide down. Take the example of onions; at one point in time they were priced at Rs. 90 per kg, while today they are available at Rs. 10 per kg.

 

The same principle applies over here too. Today (as per our findings) there is a 'pseudo' demand. On reality check, most of the apartments/flats are vacant and without customers. It could fast become a dead investment in the future. In the past it has taken more than 6 years for the prices to take off again and start giving returns. For some investors, it took that much time for them to be able to just get their money out. Therefore, investment decisions depend on your sustaining capacity too.

 

Returns are a very relative term; you should look for what is best suited for you. You should have a sound investment plan keeping in mind your short term and long term goals and then act accordingly.

Happy Investing!!

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You can write back to us at PrajnaCapital [at] Gmail [dot] Com

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