Navneet’s father invested in many real estate properties and earned income from them. The properties appreciated substantially over a period of years. Now that Navneet has started earning, 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 a period of 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 over a period of such cycles.
Navneet must have seen his father hold on to the ancestral properties for decades before they are actually sold. In real estate, patience and perseverance pays.
Investment in real estate property involves huge investment. The amount of investment is higher in metro cities as compared to Tier II or Tier III cities. The investment value can be lower if the investment is made in an upcoming project, or in 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 a period of 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 own 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 as compared to making direct investments in property.
By its very nature, real estate investment involves huge 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.
Unlike financial instruments, investments in real estate cannot be made in piecemeal or in parts. Also, a real estate property cannot be sold in parts. This reduces the liquidity churn, and funds may not be easily 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.
You must be clear about the manner of funding the property, i.e., through your own 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.
Quite often, a home loan is 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 tenure of the loan.
Like other investors, Navneet too aspires to build his corpus through real estate investments. The investments 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.