Almost all of us have reason to thank our grandparents and great-grandparents for their foresight in investing in real estate and gold. They may have done so because there was no other investment avenue open to them.
But real estate is still a great investment option, as it gives you capital appreciation and rental income. "It's an investment option since it fights inflation," says Veer Sardesai, a Pune-based financial planner.
So, how do you combine a real asset like real estate with financial assets like stocks to provide the growth impetus to your wealth? The answer lies in understanding the different wealth-enhancing roles of real estate during various stages of life. Here are eight strategies that you could adopt:
1. Start early
Start saving for a home the moment you begin your career. "These are the golden years for saving," says Gaurav Mashruwala, a Mumbai-based financial planner. "Invest in the largest affordable real estate early on in life. This should be your primary residence," says Sardesai.
Early acquisition helps you to repay your home loan
well within your working life. Also, the EMI as a percentage of your salary decreases as your pay increases, making the outflows more affordable. "If you lock into the interest rate for the loan, the interest outflow will be less than the compounding effect of inflation," says Mashruwala. And, of course, there are tax advantages.
Mumbai-based media professional Rajit Desai, 31, used this strategy to great effect. He booked a flat in Borivali-East in December 2000 when he was living in his uncle's flat and didn't have a rent outflow. He took a home loan at a fixed rate of 12.50 per cent per annum and later opted for a floating rate. Slide in the interest rate reduced his loan tenure from 15 to 10 years.
Salary hikes helped him pay higher EMIs. Now married, he says, "The value of my property has appreciated and I plan to sell it and acquire a bigger one." The appreciation has indeed been substantial. He bought the flat at Rs 1,751 per sq ft; the rate now is Rs 3,800 per sq ft. Desai gains even if he doesn't move to a bigger house. Once he repays the loan, he plans to invest the amount that now goes as EMI in mutual funds.
2. Stick to your budget
Yes, you want a home that your family will fit into, but don't over-stretch your budget. When there's a boom in the market, brokers may encourage you to go overboard and buy a bigger house in a better location. Don't give in.
Ideally, look for a property for which you can arrange the down payment, which is typically 15 per cent of the cost of the property. So, you can go for a home costing Rs 10 lakh (Rs 1 million) if you can pay Rs 1.5 lakh (Rs 150,000).
Otherwise, find out the EMI you can afford. It shouldn't exceed 40 per cent of your take-home pay. Experts suggest that you settle for the lower of the two property price figures arrived at by the down payment and EMI approaches. Remember to factor in costs such as stamp duty and brokerage.
3. Invest in real estate MFs
After you've invested in a house, it may take time for you to buy a second one. Instead, consider regular investments in REMF or real estate mutual funds which will be available soon in India. These are mutual fund schemes that invest directly or indirectly in real estate and will initially be closed-ended.
Units will be listed on the bourses and NAVs declared daily. "Returns will be 10-12 per cent, in line with the current market yields," says Deepak Sankhye, manager, investments, Trammel Crow Meghraj.
4. Invest in a second property
Once you've acquired a house and perhaps invested in REMFs, consider buying a second property, which you could rent out. "If you already have a property in your name, take the second property in your spouse's name to save wealth tax," advises Mashruwala.
Tarkesh Gupta, 35, a New Delhi-based Manager (HR) at Dabur Pharma, bought a house in Laxmi Nagar in 2000. He then invested in a society flat costing Rs 15 lakh (Rs 1.5 million) in Indirapuram in 2004.
He recently moved into this flat, whose value has appreciated to Rs 38 lakh (Rs 3.8 million), and plans to rent out his first house. "I want to hold on to the house for at least three-four years before taking a decision on selling," says Gupta. Infrastructure is expected to improve in East Delhi due to the 2010 Commonwealth Games, and Gupta expects more capital appreciation for his flat.
5. Explore emerging areas
Real estate prices will go up in the long term due to the huge demand for housing, though there may be short-term blips. While substantial gains can be made from investment in the metros, you can expect to profit from the considerable appreciation in investments in emerging areas such as non-metros and suburbs.
Should you invest in plots of land? "Land as such does not give you any rental yield. Apart from that, you will have to spend time and money protecting it from encroachments," says Sanjay Verma, joint managing director, Cushman & Wakefield (India).
But, says Jayant Varma, executive director (north) Knight Frank India, "Investing in land is certainly a good option. A new trend is emerging where investors are focusing more on tier-II and tier-III cities as land is still cheaper there." Warns Sankhye: "The risk in investing in land is extremely high. One must ensure a clean title and be diligent."
6. Diversify your portfolio
As your wealth increases, maintain your exposure to real estate by investing in residential and commercial properties. The two categories of real estate investments have different cycles and diversification helps by spreading your risk, though investment in commercial property tends to be costlier than residential property.
You can buy a small commercial property next to an upcoming project or a shop in a mall and rent them out.
7. Invest rental income
You might pay the EMI for the loan you take for your second or third real estate acquisition from the rental income from them. Once the loans are repaid, invest the rental amounts in assets like stocks, equity mutual funds, REMFs and gold to diversify your portfolio since experts recommend that real estate should make up no more than 30 per cent of your portfolio.
Beverly Mathews, 33, a Mumbai-based PR professional who lives with her parents, bought a one-bedroom house at Powai for Rs 13 lakh (Rs 1.3 million) in 2000. "Investment in property was more of a forced saving and it also helped build an asset over the long-term," says Mathews.
Recently, she rented out the property and gets Rs 10,500 per month as rent. The EMI on her home loan is Rs 11,571. She has also started investing in mutual funds to diversify her portfolio.
8. Right size your investments
Managing real estate investments becomes difficult once you retire. That's why you should sell them over time, except the home you live in. The proceeds can be re-invested in regular income creating assets such as annuities. Some of them can be invested in higher risk instruments like equity funds to beat inflation.
While real estate is undoubtedly a great tool for wealth creation, it has its downsides. You need to make a large initial investment. The advent of REMFs will remove this drawback as you will be able to invest even small amounts in them.
Also, real estate is highly illiquid, especially when compared to financial assets like stocks, so you need a long-term investment horizon. But there's still enough lustre in it to make it investment worthy.
There are numerous wealth creating opportunities that will arise from real estate; stay alert to exploit them.