Investing in Real Estate in India
Options Available:
The real estate sector has been booming for quite some time and it can be safely assumed that it is not a bubble. In India fast growing economy, real estate has emerged as one of the lucrative source of investment which can be estimated to give a fair return on investment with not too high risks.
The options available with the NRIs is to either invest directly by identifying a suitable property or go for the latest craze real estate mutual funds. By opting for a property one can look out for cities which have a good growth potential and commands a premium over other cities. If one doesnt want to invest a huge sum, then real estate mutual funds are the best options, as you can invest as little as 100$ every month and can get a return of ballpark 10 to 15% which is quite appealing. If one is interested in owning a property but doesnt want to invest capital, then you can go for various home financing options, which will enable you not to invest more than 20% of the property value and at the same time, when the prices of the property rises, you can sell off the property, repay the home loan and take back the profits. However before deciding on the option, be careful to evaluate all the options, in the sense that if you buy a property, you need to take care of the maintenance, have good acquaintances to keep you updated of the latest prices, demand etc and you should be able to execute the deals. Also you need to take care of the liquidity i.e. if you invest in the property you need to be more patient and be a long term investor. However, if liquidity is your prime concern, then it is better to go for real estate mutual funds which will give you exit option after six months. Thus depending on you financial ability and willingness to take risks, you can decide on which option is most suited to you.
Locations to Choose From:
As mentioned earlier, Indian economy is booming and there is a constant demand for land space, whether it is commercial or residential. From the commercial perspective South India and North India are the best places to look for as many companies are setting up offices in the tier II, tier III cities of this part of India. Various cities like Jaipur, Chandigarh on the northern side and cities like Hyderabad, Mysore etc on the southern side have started to command premium rentals as most of the BPO companies are planning to set up shop in these places. However it should be noted before investing that the location you choose is familiar to you and there is a care taker who is reliable and takes care of the property with utmost care. It is ideal to go for a commercial property if you have some relatives who can take care of the day to day affairs of maintaining the property i.e. collecting rent at regular intervals, paying off government dues, ensuring no illegal activity are going on in the premises etc. If your time horizon is long and you can invest a sizeable amount then it is better to go for a residential property as it requires less supervision and you can rest in peace and can get assured returns of around 50% in say 5 years time, considering the way the property prices are increasing. You should look at places of your origin so that you know the locality and the culture of a particular area, and then accordingly you can choose the property.
How one can increase the wealth:
Once you have decided on the location and the type of property you want to buy, we can work out how you can increase your wealth. Suppose you go for a commercial property, you will have better rental incomes and the ideal way would be to lease the property rather than letting out, as you are sure of a fixed income for a long period of time. It should be noted that if the property is given on lease, then the option of increasing rent by 10% every year should be there, and if the lessee is agreeable the lease should also contain a clause that you can sell the property to a prospective buyer whenever you want by giving three months notice. This way you will ensure a fixed income on your investment i.e the rent will be anywhere between 5% to 7.5% of your investment, which is a very good rate, considering you will get good tax breaks on these income. The other option is to buy a residential property at a commercial location and rent it to any organization for their top brass executives and you can enter into a lease agreement on the above lines. By doing this your principal investment will come back to you in around 8 years and you can also be assured of at least 50% capital appreciation at the end when you will sell the property.
Alternatively, if you dont want to go through the hassles of owning a property and renting it out, then you can go for real estate mutual funds. The returns on these would be determined by the market movements and there is a considerable amount of risk involved. Also the fact that needs to be considered before investing in real estate is that there is no track record of these funds to verify. This is an evolving concept and due to the boom every other company is floating a fund. Therefore adequate study should be done before investing and the best way would be to stick to well known names who have a proven track record in the mutual fund industry. As compared to returns on buying real estate, the returns on mutual funds would depend more on the market conditions. Therefore one cannot predict the exact returns, however if one is taking a long term view of around 2 to 3 years then a 15% post tax annual return can be expected, as the dividends are tax exempt. Also there would be the capital appreciation on the principal value which you will get at the time of selling the fund, which by conservative estimates will be at least 30%. However capital gains tax as applicable will have to be paid.
Conclusion:
To conclude we can say that depending on the risk appetite and the purpose of investment one can choose which course to take. In other words a person who is willing to invest a sizeable chunk of the savings into commercial or residential property will get better returns with moderate risk as compared to a person who is willing to invest a smaller sum on real estate mutual funds, where the risk is high.
Other Articles