Throughout history, owning real estate has been one of the best vehicles for wealth creation. In fact, canny real estate investments have generated the most number of millionaires and billionaires in the past two centuries. These investments may take the form of ownership of land, buildings, infrastructure facilities such as railroads and ports and other permanent structures. Investment in real estate yields two kinds of passive income – the gradual appreciation of the property value, and the periodic income from rentals and other such agreements. Moreover, such investments also offer a host of tax advantages.
Real estate investments tend to be capital intensive and long-term; they require a hefty initial outlay and are dependent on cash flows. Each property has a unique set of pros and cons and tends to be illiquid in general. Until after Independence, such investments were restricted to the uber-rich, who could absorb such inherent risks. However, since then, several new investment avenues have opened up for those interested, and involve the pooling of resources from multiple individuals to acquire property, and sharing the returns among them. Let’s take a look at some of the best real estate investment and ownership opportunities
Real Estate Investment Trusts
Real Estate Investment Trusts (REIT) are ideal for those looking to invest in real estate while avoiding the high attendant costs of maintenance. They allow individuals to diversify their portfolio without holding physical assets. Similar to mutual funds, REITs invite a number of individuals to pool their money together, which are then applied to acquiring and maintaining certain properties. Investment and management decisions are taken by experienced asset managers. The returns are distributed among the investors. The investor can liquidate his position at any time by selling his units of the REIT. REITs offer transparency, liquidity and do not charge investors unduly high fees. The first REIT in India, Embassy Office Parks REIT, got listed on 1st April 2019.
Real Estate Exchange Traded Funds
Real estate ETFs invest in the real estate market, primarily in REITs. Again, they are a great option if diversification into real estate is the aim. ETFs have an overall low cost of ownership since they are managed passively by a trust company. Real estate ETFs may invest in shares issued by REITs which in turn purchase commercial buildings, office spaces, hotels, and sometimes even residential condos. These funds are not yet available in India. There are several real estate ETFs in the market worldwide and an investor ought to properly research and consider all possibilities.
Direct ownership of Real Estate
Direct ownership of real estate requires a hefty investment amount, as well as in depth knowledge of the local real estate sector – the location, upcoming infrastructure projects etc., all of which may potentially increase or decrease the value of the investment. Direct ownership may be categorized into ownership of commercial or residential real estate. Among the two, commercial property has been known to provide both higher and steadier returns over the same period of time. Here, returns refer to a combination of annual lease rent as well as the capital appreciation of the asset per annum. On an average, residential properties attract two to three percent returns per annum, while in case of commercial properties up to twelve to twenty percent returns per annum are possible. In India, the prime cities to invest in commercial real estate are Pune, Chennai, Hyderabad and Bangalore where IT industry is predominant and constantly demanding more office spaces.
Fractional Ownership of Commercial Real Estate
This is an attractive option for individuals who have experience but are branching out into real estate for the first time. The first of its kind in India, this route allows for ownership of a hard asset for as low as Rs. 25 lakhs. The individual has total control on the type of properties he may wish to add to his portfolio. Location, type, and value are all valid criteria. By creating a market for a share in a property, such options allow for a seamless entry and exit into the real estate sector. The property manager takes proper care and maintenance of the asset as well as collect rentals from the tenants. The individual can make informed decisions based on real-time data generated. Also, the property worth is evaluated frequently. Monthly rentals from the portfolio of real estate holdings are secured which ensures passive income while eliminating risks and hassles.
Real estate can prove to be tricky territory for the uninitiated. But with experienced and skilled management, they can turn into an opportunity like none other. Fractional ownership of Real Estate is a fabulous option to diversify one’s portfolio, maximize income and reduce risks. Investors are encouraged to make an informed choice and venture into a fractional ownership of the real estate to realize attractive yields.