Real Estate

Table Of Contents

  1. Residential Real Estate

    • What It Means
    • Advantages
    • Disadvantages
  2. Commercial Real Estate

    • What It Means
    • Advantages
    • Disadvantages
  3. Real Estate Crowdfunding

    • What It Means
    • Advantages
    • Disadvantages
  4. REIT

    • What It Means
    • Real Estate Mutual Funds
    • Real Estate Wholesaling
    • Seller Financing
    • Real Estate ETFs (Exchange Traded Funds)
    • Advantages
    • Disadvantages


India’s real estate sector is witnessing a rapid growth. Studies show that by 2030, it will touch $1 trillion. With a growing economy, an expanding middle class, rapid urbanisation and prospects of a high ROI, many people also view real estate as a lucrative investment option. Are you one of them, too? Well, investment decisions depend on a person’s financial status and goals. Still, there are some factors you should consider while investing in ANY kind of real estate: The popularity of the location and its growth potential, the evaluation of the property (its condition, scope for redevelopment, amenities, etc.), investment purpose (living, renting, selling), and profit potential (immediate, short-term or long-term, depending on your goals). Also, real estate is an umbrella term which covers various types of properties. So, here’s looking at them and their pros and cons. Read on:

  1. Residential Real Estate

    What It Means: As the term suggests, these are properties used for residential purposes. These include studio apartments, bigger flats (1, 2, 3 BHKs), villas/bungalows, independent houses, vacation homes, townhouses, plotted developments, etc.

    Advantages:

    • A good long-term investment, as the value appreciates over time
    • Can be an additional source of income if you give it on rent
    • Can enjoy tax deductions (it varies, depending on the number of properties you own, whether you are living in it, or have rented it, etc.)

    Disadvantages:

    • Yield less or no profit if you need to sell immediately
    • Need to spend on renovation/repairs, etc.
    • As a landlord, you always stand the risk of bad tenants
  2. Commercial Real Estate
    What It Means: In layman’s terms, commercial real estate is a property exclusively used for business purposes. It includes shops, office spaces (small/big or even buildings), warehouses, restaurants, showrooms, tuition centres, malls, mutiplexes, healthcare facilities, retail stores, tech parks, etc.

    Advantages:

    • Higher rental yield. They yield at least twice as much as residential properties, on average. As far as residential properties are concerned, the average gross rental yield is between three and five per cent (annual) of the property’s market value. This is around six to ten per cent for commercial property.
    • Consistently increasing returns. Most commercial properties are rented for a longer period of time, with a provision for yearly appreciation. The rent appreciation percentage for commercial properties legally permissible in India is between five and eight per cent. But you will receive a higher income since the rent amount is higher.
    • Zero furnishing cost (in all commercial properties, it’s the tenant’s responsibility to furnish the space according to their needs)
    • Commercial properties are more likely to be rented by businesses and corporates. While it’s not right to generalise, they are prompter and more professional (than private individuals/families) when it comes to paying rent and respecting the conditions of the lease agreement.

    Disadvantages:

    • Harder to find the right tenant. While finding private tenants for residential apartments is easier, finding the right corporate/business tenant may take longer.
    • Higher interest rates. If you intend to apply for a commercial property loan, be prepared to pay higher interest rates (from 9 to 15%). You will also have to pay a larger sum as a down payment.
    • Harder to find the right tenant. While finding private tenants for residential apartments is easier, finding the right corporate/business tenant may take longer.
  3. Real Estate Crowdfunding
    What It Means: It works the same way all crowdfunding endeavours do. Several people get together (online or otherwise), pool money, and buy a property they may not have been able to afford individually. While some crowdfunding sites insist on a certain income level for participation, others are open to all.

    Advantages:

    • Can invest in properties which are beyond your individual capacity to buy.
    • Needs less capital compared to individual investments: Most crowdfunding platforms offer affordable investment rates.
    • Diversify your investment portfolio: With less money involved, this is an ideal opportunity to invest in various types of properties across locations.
    • More Liquidity: Since most transactions are online, buying and selling your share is easier.
    • Easier to buy/sell: Unlike traditional real estate investments, there’s no complicated paperwork. The formalities are usually completed online.

    Disadvantages:

    • May have to pay a fee to join some crowdfunding platforms.
    • The income received from crowdfunding is taxed under Sec 56 (2) of the Income Tax Act.
    • There is a lack of explicit regulatory laws, and this poses the risk of fraudulent activities.
    • As an investor, you may have limited control over the property you have invested in because most
      decisions regarding the project will be taken by the developer.
  4. REIT
    What It Means: Real Estate Investment Trusts (REIT) are a good investment option. You can buy units of real estate investment trusts that are SEBI-approved and listed on the stock exchange. These funds are then invested in multiple real estate ventures. There are four types of REITs: Real Estate Mutual Funds, Real Estate Wholesaling, Seller Financing, and Real Estate ETFs (Exchange Traded Funds).

    Real Estate Mutual Funds: Here, you invest in securities in the real estate sector. The funds thus generated are used by a real estate company to build property.

    Real Estate Wholesaling:In this scenario, a wholesaler (you) enters a contract with a property owner who wants to sell it but cannot do so for any reason(s). You can then pitch the same property to a developer/buyer/investor for a higher price and keep the profit you earned.

    Seller Financing: In this case, the property owner (seller) arranges the finances for the buyer instead of a bank/financial institution. The buyer pays the EMI to the seller at the interest rate they have agreed upon. It benefits the seller because if the buyer defaults on payments, he can repossess his property. The buyer also benefits as they might be able to secure a higher amount than the banks would have given them.

    Real Estate ETFs (Exchange Traded Funds):A Real Estate Exchange-Traded Fund (ETF) invests in real estate companies — in firms that manage, own, or even finance properties. These include REITs, developers, and builders.

    Advantages of REITs:

    • Consistent income. You may receive less income than rental properties, but it will be consistent. You may receive monthly/quarterly/annual dividends depending on who you have invested with.
    • Enjoy zero responsibility. As a ‘landlord’, you have no responsibility for the upkeep of the property or finding tenants for it.
    • Helps you invest in properties that are beyond your individual reach.
    • A good way to diversify your investment portfolio

    Disadvantages:

    • Taxation on dividends, depending on the tax slab rate of the investor. If you hold the gains from selling REIT units for more than 36 months, the amount is taxed at 10% plus surcharge and cess. If you hold it for up to or less than 36 months, it will be taxed at 15% plus surcharge and cess.
    • Like crowdfunding, you will have less control over the property.
    • These won’t help in emergencies as they offer long-term capital appreciation.

    Choose Wisely If you are looking at real estate investment, choose a property that aligns with your affordability and financial goals. Also, always choose a trusted developer. At Provident Housing, you will find all types of residential real estate – from studio apartments to townhouses. With transparency and trust being our hallmark, this is one decision you can never go wrong with.

FAQs

    1. Which is the most profitable type of real estate investment?
      While real estate investment depends on a person’s affordability and financial goals, Commercial properties are considered the most profitable investment option in real estate. The main reason for this is that they yield more rental income than residential areas. They are also generally leased for longer periods of time with zero furnishing costs.

    2. Is it wise to start investing in real estate at a young age?
      The earlier you start, the better it is. It will give you ample time to
      build a safety net with enough savings. Having said that, it’s important not to act impulsively.
      Think and plan carefully and invest only in properties that will appreciate highly in future
      years.

    3. Why is investing in real estate a good idea?
      The best part about real estate investment is that it offers a steady stream of income (rental). There’s relatively very little risk involved if you invest in a good property from a reputed developer. A long-term investment will offer good returns. Real estate investments also provide buyers with tax benefits. It’s a good way to diversify your portfolio and comes with many options – Residential, Commercial, REITs and Crowdfunding.

    4. Which are the best five Indian cities for real estate investment?
      The top 5 cities in India regarding real estate investment include Bangalore, Delhi-NCR, Chennai, Mumbai, and Hyderabad. Other cities with high investment potential include Pune, Ahmedabad, Kochi, Kolkata, and Jaipur.

    5. Can you share some tips to help beginners investing in real estate?
      Of course. Some of the basic rules include:

      • Do not rush into anything
      • Conduct extensive research before investing
      • Verify all property documents
      • Check if the location is good
      • Be aware of the market rates; don’t overpay
      • Evaluate all risk factors

 

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