• Mon. Nov 28th, 2022

Five real estate investments you should have in your portfolio

ByWillie M. Evans

Aug 18, 2022

For millions of Indians, real estate has been an attractive investment option to generate wealth and secure a stable income. In fact, 77% of Indian households invest in real estate, as part of asset creation, according to a report by the Reserve Bank of India. This asset class offers a range of benefits such as high growth potential, high investment returns, security and income stability. However, investing in the sector can seem daunting for someone with little exposure to the sector.

Real estate is one of the most lucrative investment options for consumers, whether they are senior citizens, the middle-aged consumer segment or young millennials, regardless of demographics and geography. The article explores five different real estate investments that one should have as part of their investment portfolio.

Rental properties
The most traditional way is to invest in residential properties and rent them out. The process is simple but requires a large investment in the beginning and involves annual maintenance and upkeep costs. It is essential to ensure that the asset is free from legal hassles, after which it can be acquired on lease, pre-purchased or through a loan.

house flipping
House flipping is another option that allows someone who knows the demands of the market to renovate, improve an existing property and sell it for a higher value. Here, the consumer needs capital and the ability to see, understand and make the necessary repairs. In this, the capital is tied up for a shorter period, which means it can offer a quick return.

REITs/ETFs
Exchange-traded funds (ETFs) and mutual funds that are themselves invested in real estate can be purchased. It is possible to buy ETFs that invest in real estate stocks such as publicly traded homebuilders. There are also ETFs that invest in REITs (Real Estate Investment Trusts).

The concept of REIT is very similar to that of mutual funds – it pools money from multiple investors and then invests those funds in income-generating properties. Returns are paid from the monthly rent of the invested properties.

Fractional Ownership of Commercial Real Estate
Co-ownership refers to a group of investors who pool their funds to jointly purchase real estate to reduce cost burden and risk exposure and share rental income.
Industry experts estimate that there will be strong growth in the coming years and that the volume of Class A office space in India will reach 1 billion square feet by 2025. A considerable part of this investment will would focus on condominiums.

The rental yield of a tertiary property, around 9% per year, is higher than the yield of a residential property. Thus, an investment of Rs 25 lakh in condominium has the potential to generate Rs 2.25 lakh per annum in rental income. This leads to a steady expansion of wealth and improved monthly liquidity.

Rental of part of an existing property
Even if one does not want to be burdened with a huge investment cost, it can start as small as renting a room to commercial or residential tenants. If you have a whole floor of the current house unused, it is better to rent it.

Which option is better?

With a wide range of real estate investment options available, decisions should be based on how much one is willing to invest, the type of liquidity one wants, the regularity of cash flow and the appetite for the risk.

Owning, renting and flipping properties requires significant investment and experience in the asset class. Flipping properties can generate high returns on investment, but requires a thorough understanding of the area real estate market as well as maintenance costs and expertise.
ETFs, on the other hand, offer high liquidity and low costs, but the downside is that there may be no monthly dividends and one may receive no return until he has sold the appreciated shares.

In the case of REITs and co-ownership of commercial properties – although both instruments are relatively new to investors – they are rapidly gaining popularity as they have finally given retail investors access to the most interesting – commercial real estate (CRE).

Although CRE can generate good returns, it is a high investment. However, REITs and co-ownership have lowered the cost of entry into CRE, functioning almost like crowdfunding for real estate.
With condominiums, one can expect an annual rental yield of 8 to 10% per year and an appreciation in the value of a commercial property between 5% and 10% per year. Comparisons suggest that investing in commercial real estate through condominiums can generate higher and more stable returns over the long term.



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Disclaimer

The opinions expressed above are those of the author.



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