For decades now, India has had a steady obsession with owning real estate – a fact that was quantified by the country’s central bank in a report titled Indian Household Finance. In the report, the Reserve Bank of India stated that an average Indian household holds a staggering 84% of its wealth in real estate, whereas only 5% of its income was tied to financial assets such as stocks, bonds, and deposits. The unwavering faith in realty is not surprising mainly owing to two reasons: real estate is a tangible asset and not merely a piece of paper, and secondly, most Indians have previously witnessed healthy appreciation in property prices in the long run.
In recent years, the real estate sector may have hit a few stumbling blocks for various reasons, but our enthusiasm to invest in properties has remained intact. Despite headwinds in the form of global economic slowdown, sluggish job market and demonetisation, The Economic Times recently surveyed 2,700-odd respondents to find that nearly 57% of them still found real estate to be the ideal investment destination. The vote of confidence comes in spite of property prices either going up or remaining stagnant in the last decade-and-a-half. That’s mainly because the realty sector has diversified itself in recent years and is now more accessible to all kinds of investors – big or small.
So, let’s take a look at all the investment options available to us so that we can make the right choice when it comes to investing in a property.
For most of us, when we say we are investing in a property, it means we are buying a home to move in. That makes sense because you can’t beat the emotional security of owning your own house. The other upside is that you can put up your home for rent. This way, you are assured of getting a stable income every month.
But the problem is that you need a large amount of money to buy a residential property. And even if you want to rent the property, it may take time to find a tenant. Many a times, the turnover of tenants can be very high because they often decide to shift homes after some time. You should also calculate the rental yield of the property
Selling a residential property can be cumbersome too. It is not easy to find a buyer, and if you are in financial difficulty, you may be forced to sell the house at a lower-than-expected price.
Moreover, selling the property can be especially tough if the house is not situated in the best of localities. But then again, to buy a house in a plush locality can cost you a lot more. You may decide to take a larger loan from the bank, but it is important to note that a possible rise in lending rates could skewer your financial stability in the future.
|Relatively easier to buy||Huge up-front cost to buy residential property|
|Sense of emotional security||Not easy to sell|
|Capital appreciation over long-term||Rental yield is not very high|
|Stable rental income||Can be tricky to get desired tenants|
|Loan repayment is tax deductible||Interest rates can potentially increase|
|Requires high maintenance|
|Price could remain static for some time|
For those still interested in buying a residential property for investment purposes, there are two other options available to them.
- Property flipping: In such a case, you can buy a residential property, spruce it up by adding modern features and then sell it for a higher price for a quick profit. However, you should do this if you understand the property market well. Factors such as the acquisition price, renovation costs, location – among others – play a crucial role to succeed in this business.
- Managed properties: Buying a residential property adds to your responsibilities. If you are not interested in dealing with day-to-day operations, and finding and dealing with tenants, you can hire a property management company to do so. But the flip side is that you need to pay them for their services, which means your rental income is on the lower side.
Commercial real estate costs a lot more than residential properties.
Does that put you off immediately?
While it may be true that upfront investment to buy commercial realty is a lot higher, this popular notion is changing rapidly. These days, salaried professionals are starting to put their skin in a game that, for long, was exclusively accessible to the rich. The reason? Emergence of flexible and feasible financial options. No longer does one have to put stacks of money upfront to buy commercial real estate anymore.
Before we mention the different ways to buy commercial real estate, let us quickly run through the reasons why investing in commercial real estate may be the best financial decision you may take.
|High rent||A good commercial property can fetch you an average rental yield of 6%-10%. On the other hand, a residential property gives a lowly 1.5%-3.5% yield. This means that the rent on a commercial property investment of Rs 25 lakh would be anything between Rs 1.5 lakh and Rs 2.5 lakh every month, whereas rent from a residential property wouldn’t generally exceed Rs 87,500 per month.|
|Stable returns||Lease agreement for commercial properties is generally between five to 10 years. The tenant stays for the entire duration. But that’s not the case with residential properties. Tenants switch homes more frequently.|
|Surging demand for office space||Office space is rapidly increasing in India due to surging demand. As per an Anarock report, office space will grow by 13% in 2019. So, if you are looking to make an investment, putting your money in office space now would be ideal.|
|Quality of tenants||Unlike the risk of letting in “bad tenants” into your residential property, commercial real estate automatically invites reputed businesses such as banks, IT firms and retail stores. This assures you timely payment of rent and little fuss.|
|Lower maintenance||Businesses tend to furnish commercial properties as per their taste. This means a commercial landowner doesn’t need to spend money on interior design.|
|Shields you from economic slowdown||You won’t be affected by the performance of the economy because you’d continue receiving rent nonetheless.|
The disadvantages of buying a commercial property are higher loan interest rates and no tax benefits when compared to residential home investment. But the rental yield is so high in case of buying a commercial property that it can negate these shortcomings in the long run.
Coming back to how you can afford to buy commercial real estate, here’s the lowdown:
Fractional ownership: Under this model, a group of owners can come together to buy a commercial property. For example, if a warehouse, office or retail space is valued at Rs 2.5 crore, ten individuals can each pay Rs 25 lakh to acquire the property. This allows individuals to co-own commercial properties at an affordable rate and at the same time, allows them to enjoy all the perks of owning this type of real estate.
In short, fractional ownership allows individuals with less funds to put their money in big-ticket properties.
Still at a nascent stage in India, there are a few marketplaces like Mumbai-based hBits who have forayed into this business. And with rising demand for office and retail space – office space absorption is likely to hit a record high of 42 million square feet by the end of 2019 in the country, as per property consultants JLL India – individuals would view this as an opportune moment to own before the market reaches a saturation point.
Additionally, some of these tech-driven marketplaces offer the benefits of commercial land ownership without the headaches of day-to-day practicalities. That’s because these companies have professional teams who are responsible for:
- Finding tenants for you
- Managing the property
- Doing due diligence
- Completing government paperwork
- Providing post-sale support on your behalf
To know more about hBits and how you can have ownership in commercial realty, click here.
REITs: Real estate investment trusts, or REITs (pronounced at reets), are popularly known as “real estate stock” – and with good reasons. They work very similar to how shares work in a stock exchange. The only difference between buying a company stock and a REIT stock is that with the former, you become a partial owner of the company, whereas with the latter you own a small part of commercial real estate like warehouses, hotels, resorts, shopping malls and office spaces.
However, the flip side with investing in REITs is that you don’t get to choose the commercial property you want to own, unlike with fractional ownership. Moreover, the REITs ownership is only a piece of paper, whereas with fractional ownership, you actually invest in a tangible asset. Like with stocks, REITs can be volatile because they are market-linked and speculative.
Real estate funds: These are a type of mutual funds which allow small investors to buy stocks of real estate companies. While they are an alternative to buying a property and are highly liquid, this vehicle – just like REITs – suffers from the fact that they are prone to flounder when the real estate sector doesn’t perform well.
To sum up, real estate ownership no longer costs you an arm and a leg. This is especially true for commercial property investments. With the advent of new and affordable financial options, a small investor can now aspire to buy the more lucrative commercial properties.
In fact, a model like fractional ownership helps individuals to actually “own” commercial estates! Better still, unlike REITs and real estate funds, fractional ownership helps you focus on one property instead of merely diversifying your money across various commercial estates – and thereby diluting your returns. To know more about fractional ownership of commercial properties, click here.