Most of us have dreams of buying a house or an apartment in our lifetime, unless we are very happy with our present living conditions. But how many of us look into real estate as an investment product? Off-course there are many real estate investors, but speaking about the common man and especially the middle-class, real estate as an investment avenue is a little far-fetched dream.
Today, let us see how we can invest in real estate profitably and make that dream come true.
Whether we buy a real estate property to live-in ourselves or not, it is always an investment as there is an element of capital appreciation. So, before we make the investment, we should keep in mind some vital points as with every other investment. But before I write about these vital points, do note that real estate investment itself is somewhat complex and time-consuming compared to various other paper assets. But please do not shun away from it just because of that or if you think that you do not have a lot of money to buy a real estate property. Just keep an open mind and know the vital points of real estate investment. This should be the first step towards a very profitable investment avenue.
- Locality: This is what I feel should really be the first priority in deciding about a real estate investment. If you are wrong about this one point, then even if you are right on the others, your real estate investment may fall apart. By locality I mean to say, you should consider about the cities, towns, outskirts like smaller towns, villages, beside highways, etc. where you should buy the property. Further sub-dividing these broad localities are various streets and areas inside a city, town and outskirts. Prices vary among each and every locality depending on demand and supply. If the locality is a posh one inside a city, the demand may be very high, while there may be little or no real estate space available, making the prices very high. The opposite is also true. So your job, as a real estate investor should be to scout for these high-demand-low-supply localities first and make a list of them. Do not think about whether you can afford it or not at this stage.
- Type of the property: The next vital point that should come to the mind when investing in a real estate property is whether to buy a land or an apartment or a house or to buy a commercial property say a shop, office, godown, etc. The easiest way to make this decision is off-course to think about the kind of money we have, but I would suggest zero-in on a property first and then thinking about financing it. In trying to select a property, always keep-in mind about the time-element for the prices to appreciate, as the money is blocked for a number of years and you would also be paying the EMIs of a loan. So, in selecting a property, think whether you can rent it out or not and the amount of rent that you would be getting. The rental income should always be same or more than your EMI.
- Re-sale Value: Like I wrote above analyzing the property’s re-sale value is very important when deciding the type of property you should purchase. The re-sale value depends on a number of things as the various amenities provided for example, gyms, swimming pools inside an apartment complex, proximity of schools, hospitals and markets, if it is a residential property, types of different markets and the products available if it is a commercial property, etc. We should also ascertain the rate of price appreciation from the prices of the last few years, so as to determine the re-sale value of the property in the coming years.
- Old or new: We sometime get confused whether to go for an old property or a new one? The most common idea is to think that there may be some repairing costs involved when buying an old property and no such costs when buying a new one. But what should be kept in mind really is whether we would get finance for it or not. Most banks do not finance a property more than 10 years old. It is better to avoid those because we are investing here and not buying it for our own use. The point is to make minimum capital contribution and get a faster return.
- Branded or non-branded: If you are buying a new property from a reputed developer you may have to pay a premium, which are mostly hidden in the price itself. You will pay somewhat less if you are buying from a not-so-reputed builder or a local promoter. Although such margins are declining every passing day as the markets are maturing-up, but what should really be kept in mind is that, when you are going to sell it, it would make little or no difference to the buyer. So, unless you want a brand-name and to live-in yourself, I would suggest not going for it if you are just investing.
- Timing: When we invest in other saving avenues, like paper assets, I have written about the importance of timing the investment. However, timing a real estate investment is very hard. As it takes a long time for capital appreciation, waiting for the prices to come down, is foolish. It is much wiser to concentrate on the locality and invest anytime you feel like it, as the prices will definitely appreciate no-matter-what over the long-term.
- Financing: Yes I know that this is the first question that comes to everybody’s mind when considering a real estate investment, but I have tried to convince earlier that this is not the first thing to consider about. Once you have found the right property to invest-in in terms of locality, type of the property and re-sale value, financing it is only a matter of time. Talk with various financers around like banks and determine the down-payment amount. See whether you can arrange it or not. Your EMIs should be paid from the rental income and I would suggest never paying that from your own pocket. All that you should pay for is the down-payment amount. You can take help of your accountant in trying to arrange that finance from your existing investment portfolio. If you have made a list of the properties that you would like to invest-in, then I am sure matching it up with affordability wouldn’t be an issue after all.
- Legal Papers: This is one important and obvious point that should be kept in mind while making a real estate investment. Hire a competent lawyer to determine that the property is free from all encumbrances, litigations and dues. All the required papers should be in place before the transfer of ownership.
- Ownership: Sometimes we are confused whether to buy the property in single names or joint names or in business names. We should take the help of our accountant to determine this, but the point to keep in mind apart from just taxation issues is what would happen to the property if something unfortunate happens to us. That is why making a will is so important, but buying in joint names are good options too.
- After Effects: This point means what happens after we have made our real estate investment? It is very easy to think that everything would fall into place and we would make a handsome profit with our investments appreciating after few years, right? Well, life is not a bed of roses and no investment is secure. So first, secure your investment by buying a Home Insurance. Then, evaluate the prices every year to make sure the returns are at par with your expectations. As you would be paying your EMIs from the rental income, it means you may have to deal with some difficult tenants. So keep an eye and make sure that you let it out to good people only. Lastly, while you wait for the capital appreciation over many years, you may have to bear the maintenance costs of the property from time-to-time. So make sure you keep these to your comfort levels.
I am sure that this article will make you think differently if you think that real estate investment is not for you. But that’s what this blog is all about. It makes you think differently and in the right direction. If you like this article, do not hesitate to facebook “like” and/or google+ and let your friends read it too. If you like this blog as a whole, please become my facebook friend. There’s a surprise waiting for you when you become my facebook friend. And yes, let me know what you think about this article in your comments below.