There are many reasons to invest in Real Estate in India. While there are a good number of reasons to invest in Indian Real Estate, let us at the outset also inform you one drawback of investing in real estate. The main drawback is limited liquidity which means that you cannot convert your investment into liquid cash whenever you want (and sometimes for a very long period of time). But the good news is that there are many ways to invest in real estate and at the same time eliminate that concern while still offering you all the plus points of this tried and tested asset class.
Real Estate is Real
As the name suggests, Real estate is REAL! Unlike other popular investments like stocks, bonds, mutual funds etc. which are imaginary and made of abstract concepts, real estate is a tangible asset class. You can see it, touch it and stand or dance on it! It is not an idea like bitcoins or stock options and it does not exist only on a financial statement or in a stock exchange. Real Estate is Real. That means that even if the stock market were to collapse and the current market value of all stocks fall down to zero and become worthless in a crash, with real estate you will still have something of value on your hands.
You can use your real estate holding even if the market considers it of no value. You can live in that space and convert it into productive space such as using it to grow food for example. Even if your real estate investment is not direct, even such indirect real estate investments are largely based on physical assets which allows them to hold a stable value even in a volatile market.
There is only a finite amount of usable limited supply of land available in the world. As the world’s population continues to grow and as the environment and climates become ever more unstable and unpredictable what with hurricanes, unseasonable rains, famines, drought and increasing warming, people need secure places to live, work and seek a stable shelter for their families. The demand for space has grown right along with the growth in the world’s population. Apart from shelter we also need land to produce food and deliver the natural resources such as timber, oil and minerals that power the devices and machinery that in turn power our modern lifestyles. In comparison, other investment assets are not finite. Companies and Governments can issue more shares of stocks or bonds. And while land can be repurposed to serve other needs, it cannot be created out of thin air.
When you own real property you have much more control over you investment than if you owned company shares or other paper-based assets. For example you can do things that can increase the value of your property such as doing up the exteriors or interiors. You can then increase your income from the asset by catering to more financially solid tenants such as HNI’s and expats and raise the rent. The downside of this is that your investment requires more active involvement and management from your side. You have to maintain and repair your asset or pay some other person or firm to do it.
Diversify your Portfolio with Real Estate
Diversification is an important part of successful wealth creation. You should combine many different types of investments in your investment portfolio so that the risk of the total portfolio is greatly minimised. This is all the more true if your portfolio includes investments and other vehicles that don’t act in the same way as each other. Diversification of your financial portfolio can help to smooth out the vicissitudes of the markets and increase your cash flow and earning potential over a period of time. When one type of asset is going down, others could be flying and eventually that balance keeps your portfolio on solid ground.
The Correlation Factor
Real Estate does not act like other investments and that is correct even if the real estate investments get purchased and sold like stocks. That is because real estate has a low correlation to other major types of investments. When you add real estate to the mix in your portfolio, it helps in balancing the ups and downs also called volatility in the financial world. That in turn reduces your risk of a total wipe out. Let us look at how that works. Like we mentioned Real Estate has a low correlation to other assets in your portfolio. If those other assets reduce in value by a great margin, real estate will just go down slightly. If the other assets go up like rocket ship, real estate will go up a few notches only. The highs will not be as dramatic and the lows will not be as depressing!
Different Kinds of Real Estate Investments
Though most people think that you have to own property in your name when thinking of investing in real estate – that’s not true at all. As written in our last article, there are many different vehicles available for those who would like to invest in real estate:
- Residential rental properties
- Commercial properties
- Real estate industry–related stocks
- Mortgage-backed securities
- Mortgage debt funds
- Real estate investment trusts (REITs)
- Real estate mutual funds and exchange-traded funds (ETFs)
Within each of these above categories there are even more choices. For e.g. commercial real estate could mean anything from a mall to an office complex to a nursing home. Residential real estate can include single-family homes, gated apartment complexes and even retirement communities. So even within your real estate portfolio you can hold a diverse bunch of assets.
Apart from diversifying among different categories of real estate you can also spread out your risk by investing in different geographical areas – different cities in India. That way if one area gets hit by say extreme pollution such as what we have seen in the Delhi NCR region or say a toxic chemical spill happens in a certain city you will still have productive assets in other parts of the country that remain unaffected.
In 1980, the median rent across Mumbai for a 2 BHK apartment was probably ₹ 500 or ₹ 1000 per month depending on the area. Ten years later the expense rose 5 times to ₹ 5000 per month. Fast forward to 2020 and the average median rent for a nice 2 BHK in an affluent suburb like Andheri West touches almost ₹ 50,000 per month – a ten X increase! That is inflation for you – paying more money for exactly the same thing. That is bad for tenants but great for landlords and other real estate investors who shield themselves from the negative effects of inflation by passing the cost on to the tenants. Inflation takes place over time with prices going up steadily. With inflation your purchasing power decreases. ₹ 1 lakh today buys more than it will twenty years down the line. So if you want to make your money really work for you it has to earn atleast as much as the inflation rate. Of course if you can earn more than the inflation rate even better!
In almost all cases, the value of real estate appreciates over time. The longer you hold on to your property the more it will be worth. That makes real estate the perfect panacea for inflation. Throughout India, real estate in the residential sector has increased in value to an average of about 2.5 % every year since liberalisation of the economy post 1991. Commercially property also increases on an average of 3 % annually. There are large differences between local markets in India though. Home prices in tier 2 cities in India like Kochi, Surat and Pune tend to appreciate at a higher rate annually than property-mature metro cities like Mumbai and Delhi. With real estate you have control over the value of your property as discussed above. You can increase the value of your property with the help of repairs, renovation and addition or you can let your property’s value go southwards by neglecting it and letting it fall to disrepair and disuse!
Passing it Along
As discussed earlier, real estate investments protects the investor from the effects of inflation – rising costs are passed on to the tenant in the form of annual rent increase. This benefit to the landlord works very well when the property was brought outright with full cash or with a fixed-rate loan. That means that atleast some part of your costs will not go up while at the same time you are able to increase the rent for your tenants and thus help to protect your purchasing power. This is true for both commercial and residential properties and this fact surprises many newbie real estate investors. In commercial property lease contracts are typically long-term but the lease agreements always come with “rent escalation” clauses which means that the rent will increase by a certain percentage every year. The rent increase is usually at the landlord’s discretion but most times it is arrived at based on a formula. Anyways when property rates rise due to inflation rentals on these properties also rise proportionately.
Steady Returns Reduced Risk
Investing in Real Estate offers multiple avenues for increasing one’s income – some returns are monthly and some returns come after decades. But one thing is certain – Real Estate assets are productive and bring in regular cash. They also gain value over time whether it is though market appreciation or more direct methods such as renovation. Thus we have seen how investors can use their real estate assets to balance their portfolios and to usher in steady income by reducing their risk and without sacrificing log term growth. Generally stock investors want to capture fast growth which is a high risk activity. Bond investors look for low risk and reliable income without aiming for explosive growth. Real Estate investors gain the best of both worlds – stable income and long term growth prospects.
Real estate prices move up or down slowly while stick prices move at very fast speeds. This slow movement leads to less volatility for investors in real estate as compared to the roller-coaster highs and lows of the stock market which can more often than not cause heart attacks to the weak-hearted! Which is why when one tries to compare real estate investment returns with the stock market it is like comparing an apple to apple pies! They belong together under the common umbrella of assets but they are not alike at all. If you want a more useful comparison you need to look at risk-adjusted returns because that is an area where real estate investments outshine and outclass many other asset types.
Stable Income Streams
The most enticing aspect of real estate investments is steady cash flow. When you own rental properties either directly under your own name or through a fund you are able to earn steady income through positive cash flow. The rent payments cover all property expense with money left over. That strategy works across the board whether you have a single rent generating property or own dozens of properties yourself or through a real estate fund. What is even better – Real Estate investments offer passive income which means you just sit back and collect money rather than the traditional way of trading your time for money like a traditional white collar worker does. That helps free up your time for whatever you would like to do whether it is pursuing other money-making opportunities or traveling the world!
Real Estate Creates Wealth
We all know that building real wealth takes time – lots of it! It does not happen overnight. In most cases it takes generations. But one thing is for sure – many of the riches families across the world and India have built their fortunes on the foundation of real estate. Which is why this reliable asset class ranks among the top choices for members of not only everyday people but also the Billionaires Club.
The Path to Wealth
Real estate is a proven income creator and provides all the ingredients required to create a steady and secure income-generating asset for generations to come. Real Estate offers investors a steady cash flow (through rentals), growth (through property value rise) and the chance to transform small amounts of capital into huge assets. Consider this: If you have ₹ 5 Crores to invest you can buy 5 Cr. worth of stocks or bonds or put 5 Cr. down payment on a 25 Cr. property. What seems to be a more direct path towards wealth?!
Holding on To Your Money
As a final word, you also have to remember that in India, real estate investing offers unrivaled tax advantages that help you to retain more of your earnings than you typically would with other forms of investments. Read this article by clicking here for more information on tax benefits for investing in real estate in India. That in turn gives you double benefits – you can increase your net worth and also have ample cash on hand to acquire more income-producing assets. The tax code benefits real estate investors and these advantages build up over a period of time thus giving you more capital to invest in helping you create a vast ever increasing empire for you and your future generations!