Almost every day, we all discuss the topic of Real estate and the best property investment options to buy because real estate is an evergreen topic, and people have emotions attached to it when it comes to buying a property or creating assets that result in generating income source.
Many people made a fortune through property Investments. Now almost 80% of the income of people comes from the property they invested back in the years.
We talk about property investment at parties, casual talks with our family members, about someone who has grown so much in terms of financial freedom, and how much property they have made for themselves in just a matter of time. When we are on vacation, we talk a lot about the hotel and resorts we stay at because of the revenue they generate for themselves and become wealthy.
We have seen our parents, our older brothers, and family members buying a property. It enriched our knowledge of property investment. Hearing about real estate transactions from friends also contributes to our knowledge base. But nothing is more valuable than purchasing and investing in a property for ourselves.
What are more profound insights about real estate investing used by professional real estate buyers and investors as a guide? How can a beginner invest in real estate in India as a professional to start their first property investment?
Property Investment is the topic we will be discussing in this article, but before jumping into the insights, Let’s start with fresh and basics about the property market in India.
Property Investment Market in India.
In recent years, the Indian real estate market has faced significant obstacles. Although RERA is already available, this sector is not growing.
Incomplete projects, completed inventory, lack of demand, etc. contributed to the industry’s weak results. But not even in major cities in India have decent property prices fallen.
See the price table below. Except in Delhi (not Delhi NCR), property prices in major cities have risen over the past two years (source: makaan.com).
The table above clearly shows that property prices in India continue to rise. The level of price estimation varies from city to city. If we buy a property in Hyderabad, the increase in property investment value will be relatively slow. If we buy a property in Gurgaon, the increase in value will be faster.
But wherever the property is in India, the price will go up. Why? Due to population growth and increasing buying power of the Indian middle class.
Cities like Mumbai, Delhi NCR, Bangalore, Chennai, Ahmedabad, Pune, etc. have seen a healthy rise of prices and returns on property investment.
It is a city where people generally migrate from other states for work and business.
Price dynamics in metropolitan cities are reflected in other smaller cities. Over the past 5 years, property prices in India have increased by an average of at least 5% annually. Also, add a rental return of about 3.5%. This gives the total to 8.5% per year as it results in increasing the demand for property investment.
Why Property Investment?
The rich and wealthy invest directly in real estate as property investment is a safer option than stocks and bitcoins. They own various homes or commercial properties. A stable and dignified increase in the value of your property is common Therefore, Property Investment is on everybody’s wishlist.
But part of what makes real estate investing so valuable is its ability to generate stable short-term income. Short-term income is generated in the form of “monthly rent”.
Rental income generally increases inflation in the long term. This is especially true for metropolitan cities at level 1 and level 2. As the monthly property return increases, so do total property prices. That’s why everybody should think about property investment once in their life.
What is shown in the infographic above? Real estate investments provide a guaranteed return. The return is in the form of rental income and an increase in capital value.
The rental return (interest income) increases over time. In general, this growth follows the rate of inflation. Capital growth will take place due to increased demand. As India is a young and growing population, the demand for real estate continues to increase & people will continue to seek new property investment options for more passive income.
This double effect (guaranteed rent and value growth) means that the real estate sector can generate unbeatable returns, unlike all other assets.
Real estate investments are one of the best hedges against inflation. That’s why big investors like Robert Kiyosaki and Donald Trump love him so much.
Step with caution.
Why? with the exception of some cities in India, has the Indian real estate market not really matured? Why do I say that? Because we still see random real estate developments in most cities in India.
Good properties must be developed, sold, and maintained according to an overview plan that covers all services.
Unless the property has a solid master plan, its long-term increase in value is doubtful. In most cases, the value of the property decreases over time.
The problem is that most properties are not planned or developed by bad developers. This makes real estate investments in India a bit risky.
How to Invest in Real Estate?
So how do you do that? Here are some ideas that beginners can use to understand how to invest in the real estate market in India. Also read about REIT in India.
Real estate and property investment is one of the most expensive investments a person makes in life. Property prices in India can range from a few lakhs to a few crore rupees. Before setting out, it is therefore important to answer “how much should I spend on buying a property”. How do I find out?
This can be done by following the general rules shown in the flow chart above. A person whose income is 100,000 Rs and has 5 lakhs savings can afford a property of Rs 35 lakhs.
In addition to your income and ability to save, your credit rating also plays an important role in getting a home loan. If you do not have a high enough credit score, it is difficult to get a loan.
There is another aspect that increases the cost of real estate. There are legal fees associated with the purchase of any property. Around “other taxes” cost around 10% more. This further affects accessibility. The following is a typical dividend for these costs:
- Stamp Duty (6%).
- Registration (0.5%).
- Brokerage (0.5%).
- Advocate Fees (0.1%).
- Home Loan Processing Fees (0.1%).
- Tax Deducted At Source (TDS-1%).
- Society Administration Charges (1%).
2. Prepare for Home Loan.
First, you should check your credit rating. If the score is low, take action to improve it. Why do you need to check your credit rating?
Because the bank will not grant a loan if the credit score is lower than 700. Therefore, it is best to check the score before applying for a loan. You can check your credit for free on CIBIL’s website.
In addition to credit points, banks also want to examine “EMI’s ability to pay” by examining other documents. Therefore, it is better for borrowers to keep these documents:
- Latest salary slips (of last 6 months).
- Income tax Return (ITR) of last year.
- Bank Statements (of last 6 months).
- Statement of Assets (financial & physical).
- Address Proof.
- Identity Proof.
- Other documents as asked by the bank.
The combination of “credit score” and “ability to pay EMI” determines eligibility for a home loan. Check: Income-based eligibility calculator.
What should be done to improve loan eligibility? Before applying for a loan,
try to pay off other loans (such as credit card debt, personal loans, etc.).
It is a good idea to get a mortgage deed from a bank before you start your real estate and Property investment search.
Also compare your loan eligibility data with the affordability calculations made in step 1 above. If step 1 says so, the loan eligibility is Rs.30 lakh and in step 2 the bank is ready to give Rs35 lakh – choose a lower number.
3. Criteria for Property Selection.
The goal should be to buy a good property. What is a good property? It must have at least two characteristics:
(a) Attractive project plan and
(b) Value for money.
What is an interesting project plan?
The distribution between open areas and occupied land (after buildings) must be optimal. The more open surfaces, the better is the property investment.
What is value for money?
The property Investment does not have to be expensive. How to define expensive? I followed this rule for myself. The return from property rental must not be lower than 3.0%. Suppose a property is worth 35 lakh rupees. If you use the rent, it will cost you Rs 10,000 per month. The rental return will be 3.4% (10,000 × 12/35,00,000).
For a beginner, it is important to know what to look for in a property. Investing in real estate can not be done solely for aesthetic reasons. Proportional weights must be assigned to at least the 14 parameters below:
If the availability is Rs.35 Lakh, and the property on offer is costing Rs.40 Lakh, it is definitely not affordable. This is one of the reasons why the availability calculation in step #1 is so important before you commit.
The real estate investment must be carried out in a place known to the investor. Investments in unknown cities should be avoided. The location of the property in the city is also important. Properties that have schools, markets, hospitals nearby are preferable.
The focus of the street is important. If there is a wide paved driveway that connects the property, it’s thumbs up. Public transport such as metro, bus stations, car rickshaws, Ola / Uber connections also provides added value.
Particular attention should be paid to the demerits of property. Typically can be as a busy road, too close to a train station or airport, traffic noise, remote location, elderly people, etc. These factors cause difficulties and also reduce the quality and standard of life of the people residing.
3.4 Type of House:
If the preference is the apartment, a multi-storeyed apartment does not work and vice versa. Before you do a property search, you must first determine the type of home.
3.5 New or Used:
Used houses can be excellent value for money. They have the advantage of a manufactured property and an established location. They can also have predefined services such as internet, heating, carpentry, modular kitchen, etc. But the new property also has its benefits.
3.6 Number of bedrooms:
For a small family, even a studio apartment will sufficient. For others, the requirements can vary from 1/2 BHK for larger apartments. Personally, I like to evaluate a property first based on its size (in Square feet) and then on the number of rooms it can offer.
3.7 Open Floor:
There are some properties that have slots and pockets for cabinets, cupboards, refrigerators, etc. These homes offer better “open space management” when the furniture is installed. In general, a home should be able to accommodate your special furniture (such as an upstairs, bicycle, pram, etc.).
If you own a car, two wheels, etc., the property must offer adequate parking.
If the property already has facilities set up for services such as cable TV and broadband, etc., this can save a few dollars. Generally, look for mobile and internet connection in the area. There are some areas that have a poor connection to the mobile network.
For a period, homeowners want to expand their living space. Properties that have the conditions for renovation may prove useful in the future. For a period, homeowners want to expand their living space. Properties that have the conditions for renovation may prove useful in the future.
For some people, building a roof garden on the balcony is a big plus. If you are looking for an apartment, check if the open space allows gardening. Properties under such conditions become desirable.
3.12 Present Condition:
Check the “building status” of the property. If it is a new property, there are no problems. However, in used homes, modifications or repairs may be required. It is advisable to be aware of these additional costs before taking over ownership.
3.13 Condition on Outside:
The apartment may be nice from the inside, but is it just as good from the outside? Be sure to overhaul the property from the outside. Look for paint, cracks, leaks, loose threads, discomfort, parking quality, etc.
Nowadays, society is plagued by robberies and random thefts. Be sure to check if the property has special security guards and security cameras installed in the society.
It is also a good idea to visit the property at least three times before you get the last call.
Visit 1: try to get to the property from your office, etc. during rush hour. This will give you an idea of the jam.
Visit 2: See the property at night. You will be able to assess the environment during these hours. There are properties that look too gloomy in the dark. Avoid them.
Visit 3: Try to visit the facility on the weekends. This will give you a new perspective and you can even socialize with some of the existing residents to know more about the property and environment.
4. Ask Your Property Agent.
What was done in step 3 above is about “big stuff”. There are also minor issues to consider. A real estate agent will be able to answer this question (honestly).
There are strategic questions that should be asked of the current agent or owner:
- Remained unsold: How many days has the property been on the market for resale? Some properties are sold out in a few days. Some properties take time. The idea is to find out the reason for the delay. The reason may be too high a price, a bad Vaastu, etc.
- Employment history: Ideally, you should avoid buying properties that have had several jobs before. The goal should be to buy a used or third-hand property. If the property is occupied by the first owner, this is a great advantage.
- Current ownership: Who currently owns the property? If no one lives inside, there are no problems. But if the property is occupied (for example by a tenant), when will they be released? How long have they lived?
- Direct contact with the seller: before making a final decision, it is always best to have a personal conversation with the owner. A person may not like to buy property from a suspicious or inappropriate character.
5. New Home: Points to take care of.
There are some unique features that are only displayed with new (under construction) properties. They also require separate care and handling:
Purchases of new properties, under constructed property, are often initiated after verification of “vacant plots” and “approved plans”. To start the purchase, the buyer pays the builder an order quantity. Be sure to ask for a refund policy before making a payment.
If you are considering a home loan, the first deposit (which will be your contribution) must be paid immediately after the order. Why? Only then does the loan disbursement process begin. Be sure to notify your legal consultant about this payment.
Builders may prompt you to apply for pre-approved lenders (for loans). You do not have to follow their advice. You can go with your bank.
Completion schedule: From the order date, it can take up to 3 years for a typical Indian builder to complete the project. Be sure to ask the builder about the project schedule (and milestones). Ask how the manufacturer will compensate for any delays.
There may be conditions under which you may want to leave the store in half. This is where the withdrawal clause comes in handy. Read and discuss with your builder. How much have you lost? How will money already paid out etc. be returned?
New buildings generally have a 10-year warranty against design defects. There is a 2-year warranty for common defects. Be sure to ask your agent/builder about the same.
what is included in the finished house? Finishing of paints, electrical systems, plumbing, finished floors, modular kitchens, cabinets, furniture, etc. The idea is to find out in what finished condition the house will be delivered to you.
6. Check the Builder’s Reputation.
Try to find out the builder’s reputation. Some developers tend to address issues related to plan approval, last-minute changes, work delays, poor quality construction, etc. The idea is not to fall in love with this type of developer.
The best way to identify a good developer is to visit their old website. If possible, meet some locals to get an idea. Some of the most important characteristics of a good developer are:
1. Project completion on time.
2. Quality design (outdoor environment).
3. Good flat design (deep design).
4. Superior build quality.
5. The quality of the installed fittings (lighting, taps, etc.).
The combination of “good developer” and “affordable property” means a good investment.
7. Search for Property in the outskirts.
Properties located in the city are often expensive. There are ways to identify good and cheap properties.
Look for upcoming properties on the outskirts of the city. Do not go too far from the city. The idea is to stay in the city, but in the suburbs. I found this a very useful method to find the project.
At the time of purchase, the property may seem a bit remote. But in 2-3 years they will be the next city center. Buying a property of this type and keeping it for more than 3 years is profitable.
8. Book Property in Project Launch.
Project launch is the time when a developer first publishes his project plans. At that time, the developer also measured the public’s perception of his project.
Booking a property at the beginning of the project can be more profitable. Manufacturers usually offer prices 20-30% lower at launch.
If society’s response is good, property prices will rise when the project is launched. For the general public, the launch price of the project is usually the best price to buy. It is a good idea to monitor the launch of a good development project in your city.
It should also be noted that at the beginning of the project, the manufacturer may not have received the necessary project approvals. Therefore, it is important for the buyer to ask about the approval schedule. Only after approval does construction begin.
9. Look for a Small Property.
We are often tempted to buy large properties. This is a mistake. Not only is this more expensive, but it also means higher long-term maintenance costs.
Reports have shown that smaller properties tend to offer better value for money for investors. Compare 2BHK and 3BHK apartments. Who will sell first? 2BHK, because it is cheaper.
In the same way, 1BHK apartments can be bought and sold faster. Small apartments are increasingly in demand. Wealthy investors would also like to buy several 2BHK homes in large penthouses.
There are three reasons for that:
- Less money is locked in the property.
- Due to its small size, the clearance is easier.
- There will be a wider range of buyers for small properties.
Alternative ways to invest in the real estate sector
One of the biggest disadvantages of real estate investments is that they are capital intensive. Buying and selling physical property is not as easy as stocks or mutual funds.
Therefore, quite a few investors choose to stay away from real estate investments. But there are ways to invest in real estate without getting involved in physical property. Here are some of them:
Real Estate Mutual Funds: There is only one real estate fund in India. This program was started by Aditya Birla Sun Life. It is included in the category “Fund of funds”. They mainly invest in real estate around the world. 95% of the portfolio components of this fund are absorbed by the ING Global Real Estate Fund. There are currently no real estate ETFs in India.
REITs: After physical property, REIT is the best option for real estate investments. But again, there is only one REIT currently being launched in India (Embassy REIT). Once the REIT market has matured somewhat in India, this will be one of the best ways to invest in this sector.
Real estate company shares: It is also an alternative profitable investment in the real estate sector. How to find a good company that operates in this sector? See the list of components in the S&P BSE Realty Index. Currently (as of 2022), there are 10 components in this index (see below). You can consider buying shares in these companies at a discount rate.
This real estate investment idea may seem basic, but it is effective. For a beginner, these tips can help create the right strategy.
- Location of the property.
- Property size.
- Acceptable quality and facilities.
- Time of purchase.
One of the biggest real estate investment spoilers today is “project delays.” Although not all delays are caused by the builders, they will always have some responsibility for them.
Good and well-known developers always seem to find a way out and complete projects on time. When it comes to real estate investments, there may be a better track record than completing on time.
I hope these ideas help you think about your next property purchase. Write in the comment field below and share your point of view.
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