21/07/2022
๐ ๐ข๐ก๐๐ฌ ๐๐ก ๐ฅ๐๐๐๐ง๐ฌ
The real money lies in Real Estate. In this article, we are going to talk about real estate as an investment option also we are going to compare the Indian and American real estate investing techniques.
First, we need to understand the basic difference between residential property and commercial property.
๐๐๐ฌ๐ข๐๐๐ง๐ญ๐ข๐๐ฅ ๐ฉ๐ซ๐จ๐ฉ๐๐ซ๐ญ๐ฒ: Residential property is property zoned specifically for living or lodging for individuals, it may include standalone single-family houses to large, multi-unit apartment buildings.
๐๐จ๐ฆ๐ฆ๐๐ซ๐๐ข๐๐ฅ ๐ฉ๐ซ๐จ๐ฉ๐๐ซ๐ญ๐ฒ: Commercial property is real estate that is used for business activities. Commercial property usually refers to buildings that house businesses, but can also refer to land used to generate a profit, as well as large residential rental properties.
๐. ๐๐๐ง๐ญ๐๐ฅ ๐ฉ๐ซ๐จ๐ฉ๐๐ซ๐ญ๐ข๐๐ฌ: This is the most fundamental form of real estate investing, in this type of investment you buy a property and earn from it through rental income and capital appreciation. Rental property can be residential or commercial.
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๐ฅ๐ข๐ฉ๐ฉ๐ข๐ง๐ ๐ก๐จ๐ฎ๐ฌ๐๐ฌ: Flippers buy properties intending to hold them for a short period, often no more than three to four months and quickly selling them for a profit. We buy a property, make necessary changes to appraise its value and then sell it for a profit.
๐. ๐๐๐ง๐: This is another favourite form of investment specifically for Indians, in this technique, we buy a piece of land, hold it for a few years so that it appreciates in value and then sell it for a profit.
๐.๐๐๐๐๐ฌ: REITs stands for Real Estate Investment Trust. This is a comparatively modern form of investment in real estate, also it is cheaper than the traditional ways of investing in real estate. You can treat REITs as a mutual fund of real estate where a trust is created and a fund manager is appointed. The fund manager collects the money from individual investors and collectively invests it in real estate and provide returns in the form of monthly rentals and capital appreciation. Minimum investment in a REIT in India can be as low as Rs 10k-Rs 15k.
๐. ๐๐ญ๐จ๐๐ค๐ฌ ๐จ๐ ๐๐๐๐ฅ ๐๐ฌ๐ญ๐๐ญ๐ ๐๐จ๐ฆ๐ฉ๐๐ง๐ข๐๐ฌ: This is an indirect way of investing in real estate. These were some of the major ways of investing in real estate in India, nowadays other options like warehousing and lease options are also picking up the pace.
Now comes the most important part of this article i.e. the comparison between real estate investment techniques available in India and the USA. Real Estate investing in the USA is comparatively easier than in India, the reason is interest rates. The housing loan interest rate in the USA is between ๐-๐% and the rental yield over there is ๐-๐% (pre-covid times), also you can get a loan of up to ๐๐% of the property value, so what the Americans do is they look for a suitable property, pay the ๐๐% down payment and finance the rest ๐๐%. The major advantage is the difference between the rental yields and the home loan interests and because of this difference they can generate positive cash flow. They can generate an extra source of income without infusing much of their money.
In India, the situation is different. The housing loan interests rates in India are nearly ๐% (pre covid period) and the rental yields over here are ๐-๐%, which means you cannot generate positive cash flow from the rental income and you have an only capital appreciation as a way to make money. Though you can still get a loan for up to ๐๐% of property value in India, it is not beneficial as it won't generate any cash flow, so if you want to reduce the EMIs you have to spend more money from your pocket to generate positive rental income.
Hence at this moment, the best way to invest in real estate in India is to invest in REITs. We haven't seen any significant revival in the real estate industry since the crash of 2008, we can take the case of NIFTY REALTY as an example, in 2008 NIFTY REALTY touched the high of 1878 and after the crash, within 1-year NIFTY REALTY fell to the levels of 161, since then it has been trading in that range only, until recently when it crossed the level of 400. Moreover, the upper band of the Gen Z generation will be starting their careers and their families in this decade so I believe that this can be a major reason for the revival of the real estate sector and if we are lucky enough, we might see NIFTY REALTY at 1800 levels within next 5 years. And as Indians, we have an undying love for "zameen".
