Evaluating Real Estate as Investment
Build Wealth with Real Estate
It has always proven to be a wise decision for people to use a majority of their monthly income for day-to-day expenses and invest a portion of that income into long term financial investments like real estate. The opportunity of building wealth and having financial freedom by strategizing your investments mindfully on how and where to invest in real estate always stands, wherever you are in life. These strategies have proven to be helpful in times of various financial challenges like funding your children’s education or ensuring a happy retirement.
However, you will have to plan your investments properly. It’s important to analyze the investments you consider for long term gains and plan your path accordingly. Purchasing stocks can turn out to be easier than purchasing your first property. All you need to make sure of is you have:
- A financial and real estate investment plan.
- Considerable amount of patience.
- The iron will to make it happen.
In this article, we at Gupta & Sen, will show you how you can make the most out of investing in real estate while sharing our thoughts and insights on building wealth using a long-term real estate investment strategy. First, let us dive into the potential and benefits that real estate investments come with.
The Potential of Real Estate Investments
Not only does the value of real estate properties appreciate in the years to come, but you can also earn a good amount of current income from these properties. So, not only do you make a smart investment choice but also generate revenue throughout the year. Real Estate investment is the perfect example of a growth and income investment. Stated below, are some of the benefits that real estate investments provide:
- Tax-deferred Compounding of Value: When you purchase real estate, it appreciates over the years. 5 years later you will have a considerably increased value of your property. However, unless you don’t sell it, you will not be taxed for the profits you gain when it appreciates. The tax you have to pay while selling appreciated property is known as Capital Gains Tax. There are ways to substantially reduce Capital Gains Tax like buying Capital Gains Bonds. You can even get exempted from Capital Gains Tax if you buy another residential property after the sale of the current one.
- Regular Cash Flow: Of course, property that can be rented will provide you with regular income. You get another stable revenue stream by purchasing real estate. This can not only cover up your personal expenses but can also help in covering up the expenses you come across while owning the property for e.g. regular maintenance, property tax, insurance, etc. Depending on the kind of property and space you get, you can maximise your income by even renting to multiple people through tie-ups with co-living providers such as Zolo Stays and other companies. If you have a residential property, you can also sign up for online rental marketplaces so that people can book your property and pay you to rent for a short period i.e: less than a month.
- Reduced Income Tax Bills: Since real estate is a fixed asset or a long term asset, you can incur another expense, depreciation. Depreciation is the possible decline in value. It is not a cost you can pay upfront and is attached with the possession of the property over time. You can always claim the recovery of depreciation expenses by showing them in your accounts because of which your tax will get recovered accordingly.
- Rate of Increase of Rental Income versus Overall Expenses: Your rent rates will also be rising faster as compared to the expenses you incur. This means you not only benefit from the appreciation of your property’s value, but you also benefit from appreciation from operating profit.
Caveats for Real Estate Investing
Even while having such great benefits, real estate investments can have a few hindrances. Let’s dive into the caveats that come with real estate investing and any possible workarounds for them:
- Upfront Operating Profit Challenges: in the early years of owning a property and renting it out, your operating profits will be small, or maybe even negligible. If the economy is going downhill, your rental rates will rise slowly. There is also a chance that your rental rates will fall. Therefore you must prepare for tough financial conditions if such a situation arises.
- Demand and Supply forces: There is no fixed rate of return you will be able to earn every year. Just like stocks, real estate rental rates and property’s value are also subject to the ups and downs of the market. Even though this can also lead to less or negative returns, this also has the potential of providing us with a rate of return much more than what we anticipated. So it is better to hold the property for many years to reap the benefits of exponential growth in returns.
- Transaction Costs: If you purchase a property and plan to sell it in a year, even though your property will have an appreciated value you will lose out on money because of the humongous transaction costs you will be charged. Transaction costs, which can include stamp duty and registration, repair (if any), foreclosure charges for your loans and so on, can amount up to 15% of the purchase price of your property. Again, holding your property for many years is better here so that even though you pay transaction costs you will still earn a good amount of final profit.
- Taxes: There can always be taxing coming up along the way of making a transaction. There are laws like section 24 (exemption on home loan interest), section 80C (claim tax benefits on the repayment on principal amount) that can help you reduce your tax payments.
- Low chance of return goals: You have a higher chance of achieving moderate goals of return on your investment compared to huge goals. But then again, it is still very much possible to achieve such goals. We at Gupta and Sen can always discuss your goals and find you the best possible solution for your return targets.
Buying Real Estate is an investment, if carefully planned with a clear and long-term vision, it can give you a return like no other. It’s an investment journey that over the years will help you to make the most out of your money and also has the potential of being a good revenue stream. However, it is vital to have a team by your side that can help you with planning out your investment strategy and choosing the best properties among your investment options, especially when it comes to luxury real estate. That’s where the team at Gupta and Sen steps in. With the experience and knowledge of the ins-and-outs of the luxury real estate scene, we make sure your investment makes its way to the poshest of properties in Mumbai. So, let’s talk about the best path of real estate investment for you today. Call us and lets talk 🙂
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