Introduction
Navneet’s father invested in many real estate properties and earned income from them. The properties appreciated substantially over the years. Now that Navneet has started making, he also wishes to invest a part of his savings towards real estate as an asset class.
Any investor should keep the following parameters in mind before starting their investment journey in real estate.
Long Term Asset Class
Expecting the real estate investment to yield capital appreciation over 2-3 years would surely disappoint you. As an asset class, real estate investment involves long-term investment. It is impacted by cyclical changes, and income is earned throughout such cycles.
Navneet must have seen his father hold on to the ancestral properties for decades before being sold. In real estate, patience and perseverance pay.
Huge Investment
Investment in real estate property involves enormous investment. The amount of investment is higher in metro cities than Tier II or Tier III cities. The investment value can be lower if the investment is made in an upcoming project or the city’s outskirts near a potential airport / industrial park.
Procuring a home loan or a real estate commercial loan can reduce the financial outgo as the EMIs have to be paid over some time. You can use the home loan EMI calculator to calculate your EMIs for various home loan interest rates.
The initial investment can also be reduced if you can find a person who can be a co-owner; however, co-ownership of the property has its pros and cons.
Real estate investment can be made even through dedicated Mutual Funds or Exchange Traded Funds which you can invest in piecemeal. In this case, the upside may be restricted compared to making direct investments in property.
Risk Capital
By its very nature, real estate investment involves massive risk as the amount blocked in is high, and the investment tenure is also long. The risk aspect can be reduced by investing in properties in reputed developers, acquiring properties in upcoming locales when the prices are low, etc.
Liquidity
Unlike financial instruments, investments in real estate cannot be made piecemeal or in parts. Also, a real estate property cannot be sold in parts. This reduces the liquidity churn, and funds may not be readily available from a real estate property unless you offer the property for distress sale.
Regular income from property may be generated if the property is let out. Renting out a property involves a background check of the lessee, executing a lease agreement, and ensuring that you receive timely rent payments.
Financing
You must be clear about the manner of funding the property, i.e., through your funds or a home loan. Even in the case of a loan, you must arrange for around 20% of the amount of the property yourself.
A home loan is often preferable as the lender’s professional team thoroughly checks the property title documents. A good credit score and investment in projects of reputed builders can increase your home loan eligibility.
Some builders have a tie-up with the banks that offer discounted home loan interest rates. You can even use the home loan EMI calculator to calculate EMI over the loan tenure.
Conclusion
Navneet also aspires to build his corpus through real estate investments like other investors. The assets can be funded through a home loan so that he does not have to arrange for a large sum of money at one go. However, he must keep in mind the key characteristics of real estate investment like high capital investment, high risk, lower liquidity, etc.
