Real Estate Investment- 101- always better than stocks and mutual funds?
'Mutual funds Sahi Hai' is a campaign that I have always been puzzled about. It deceptively gives the viewer an impression that Mutual Funds are the holy grail of investing. I have got numerous calls from my friends, clients and acquaintances panicking when their share and mutual fund portfolios dropped by as much as 60% bringing their losses to a level which, if realised, will wipe out all profits made in last 5 years of investing.
Of all the degrees I accumulated, experts we consulted and charts we read, my investment returns was beat by my simpler parents who invested in Gold and Real estate. Even after my repeated sniggering to them in the past claiming that their returns are meagre and not noteworthy. They have beat my portfolio and there is no shame in admitting this. Wherein my stocks portfolio is expected to recover from present losses in next 3 years, the people I know who had real estate heavy portfolio are not expecting any losses. Even in Covid-19 times the Real estate heavy portfolio of my parents has not even suffered 7% losses while they continue earning their rentals. It makes you ponder if we have been missing out on investing in real stable assets due to the heavy marketing by Mutual Funds and Stock brokers? Are we ignoring the real assets in favour of dematerialised instruments?
This article is written to teach you the basics in Real estate investment. I would encourage everyone to explore investing in Real estate as I believe the Golden Times to invest in Real estate have returned.
Why do I claim these are the Golden Times you ask? Each Real Estate Developer I know is now coming up with schemes where in you may book an asset in your name with an amount as low as Rs 10,000. Majority funds are postponed to possession, with no burden of loan till such date. Some Developers have come out with assured rental plans and more new products are expected in coming days. Bankers have reduced margin requirements and eligibility of loans of borrrowers has gone up due to ease of rates by RBI. Rates in real estate market are stable, RERA has brought in transparency and buyers are now in the driving seat. If you are still not convinced I urge you to look at any real estate area in your city and find out if rates have dropped. Where in average drop in stock market prices, even in Blue Chip companies is 15% , there is absolutely no drop in your real estate investment values. I believe its time to go back to the basics and invest like our parents did. Real Estate! Real Estate! Real Estate!
Knowing your limit: First step in investing in real estate is introspection. The first thing you need to learn is that investing with too much borrowed capital wipes out your earnings from real estate. You need to create a thumb rule for your self. When investing, the general rule is that you do not borrow more than 30% of value that you are investing in real estate. Investing in real estate is a marathon. You cannot treat it as a sprint, you cannot expect returns to show in first few years of your investment. But if your goal is long term i.e if this investment signifies your retirement fund or your childs education corpus then this is the most ideal avenue to invest in.
Research, Research and Research: Unlike investing in stocks and mutual funds you do not have ratios to look at on moneycontrol or charts to monitor rates to decide if your pick is right. So to know whether you are investing right you need to do some groundwork. Start with the Developer Background, you need to ask about how many square feet has he delivered till date. Visit a few completed sites your self and ask the residents/users about their experience. Ignore online reviews completely. I say this as the only people who review real estate online are the people who have taken a spite to the developer. The online review system is rigged against developers and going by that logic there no single good developer across India. Even after you have picked your investment unit, contact a few brokers in the area as a new customer and ask them for a review. If atleast 50% of the brokers give a good review you have a winner at hand. Visit websites of good EPC's like Knightfrank, Colliers, CBRE or Crisil to find micro market reports on the area you are investing. Check for recent trends of rates in the area on sites like housing.com and magicbricks.com. More importantly check all projects the Developer is building which are ongoing and check if there are persisitent delays. A Developer may have been a great investment in past but in recent times he may have lost touch, stay away from such investment avenues. If you invest 1 day before putting 1 lakh in stocks imagine the time you need to dedicate to invest 50 lakhs in a real estate unit. Only those who follow this process meticulously will be successful in picking out the winners.
Diversify and Collaborate: In my career I have seen people make loads of money by coming together and investing in real estate as a group. Peer groups of colleagues, relatives and friends can be a great stimulus to investing correctly in Real estate. For Eg. If you find investing in an office space lucrative, instead of borrowing 30% fund, you should try and get two more known associates to jointly purchase the unit debt free. There are enough legal agreements and methods to secure your investment. You can set up a mechanism wherein you can buy the other partners share for a fixed return if you plan to hold the unit yourself. Exploring joint buying is the key to having great bargaining power too with the Developer. This may also help you diversify your investment. Instead of investing 50 lakh in one residential unit, a group of 5 people can own 2 residential units in different areas and one office space together thereby leveraging your risk and returns. Its time to think innovatively to capitalise on such investment opportunities.
I believe its time for a switch in investing patterns of masses. The recent volatality of Stocks and Mutual funds have shown everyone how they are not the safe havens that the brokers want us to believe. My experience has shown that the people who propogate stock investing and mutual funds are the ones who on personal front have the highest Real estate holdings. Its time to realise where the real value of investing lies and to break the illusion that only stocks and mutual funds are profitable avenues.
This is only the first part to a series I plan to write on investing in Real estate. Do let me know your comments on the above. In next article we will read on what to check before investing in Real Estate.
- written by Saransh Dey
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