Investing in real estate could be one of the rewarding decisions of your life. If you look around, you will find several success stories wherein people with average income made it large in life, all thanks to the capital appreciation garnered by their investment in real estate.
There is no second thought that one should invest in real estate in order to achieve his financial goals. At the same time, investing in real estate is fraught with risk. It involves large sums of money and therefore you have to be lot more cautious in your approach.
Today we will discuss the major aspects of investing in real estate. The tips and advices in this article will help you in taking well-informed decisions.
Purpose of investment: Investing is art as well as a science. Just like an artist or a scientist who visualize what they want to come up with, you also need to determine your objectives of real estate investment. It is a good idea to make a purpose statement. Whether you want to invest for long-term rental income or short-term capital gains, all your thoughts should be clear before you zero-in any property.
Once you are okay with your purpose of investment, you will automatically move towards that direction. If you wanted short-term capital gains, you won’t end up buying a property whose value is likely to appreciate only when it gets a metro rail project after 5 years, you will look for properties whose chances of capital gains are near-term.
Risk management: Let’s say, you have a corpus of Rs 1 crore to invest in real estate, how would you proceed? Will you invest the entire amount in buying one property or diversify it in 1-3 properties? Experts say that never put all the eggs in one basket. You should always spread your risks. If you buy more than one property, you minimize your risks strategically.
Due to any reason, if one property is not able to meet your expectations, then the other ones would balance it off and help you keep the ball rolling.
Financing: Real estate investing is capital intensive. As legendary investor Warren Buffett says your investments should be such that even if the market is shut down for 10 years, it doesn’t matter to you. This statement explains everything.
As a thumb rule, never buy an investment property on large amount of loan. It is okay to finance some part of it, but the amount of liability should not go beyond 50 percent of the total investment size in any case.
In India, rental returns from residential properties hover in the range of 2-4 percent a year, while commercial properties can generate 4-7 percent annual returns. Loans, on the other hand, are available from 8.4 percent for residential properties while commercial properties do not get mortgage finance and therefore people opt for personal loans that come with an interest rate of 14-15 percent.