Indians, conventionally, think that real estate and residential properties are synonyms. Not much of thought is given to any other real estate such as commercial properties, agricultural land, and industrial land. Buying a property or multiple properties is one of the usual real estate investments which every Indian makes. Owning a home is considered more as a matter of honour than as an investment option. This coupled with the income tax benefits available for home loan holders makes investment in homes a very attractive proposition for investors in India.
Do we know what real estate means? So does it even make sense to invest in real estate? Are there certain points to be pondered up on before you buy a house? Do we have other options of investments under real estate? This article provides answers to all these questions and gives you a few pointers which you can use while investing in real estate.
Real Estate as an Investment Class
Real Estate can be divided into a few categories, such as residential properties, commercial properties, agricultural land, and industrial land; though we tend to equate real estate with residential property alone. Each class of real estate obviously serves a particular purpose. Owning a piece of land, no matter under which category, is considered as an asset. In certain places, the demand for land has increased and hence resulted in a consequent increase in its price as well. Historically, housing properties have given an annualized return of about 14-16%1 in the last few years. Similarly, the value of other real estate investments such as commercial buildings and industrial lands has also increased.
Given that the return on investment in real estate is higher than bank FDs, it is prudent to invest in real estate and treat it as an asset. It surely provides a thrust to one’s overall investment portfolio.
Points to ponder before making an investment in real estate
Type of real estate investment: Many Indians buy a house by default. It need not be so in your case. If it is the first investment in real estate that you are making, establish whether you need a house to reside in. In case you plan to stay with your parents who already own a big enough house or your spouse has already bought a house or if the intent is to buy a house and rent it out, you can also consider buying a commercial property and renting the space out. It will add to your income. In case, you do not belong to any of these cases, then go ahead and buy a residential property to begin with!
You can also consider investing in agricultural land or industrial land in areas where land value is expected to increase a few years down the line, even if you do not plan to pursue either of the two activities. While the investment may not be giving you immediate returns, in prospective areas, the return on investment at the time of final sale will be quite high thereby compensating for the initial period of no returns.
Geographies for investment: Immaterial of which real estate investment you plan to make, the geography of the real estate is extremely important from an investment perspective. Buying properties near rapidly growing industrial areas and technology parks give a higher return on investment at a shorter time because in such places, the property market would be in a steep growth trajectory. Similarly buying in posh and elite areas is likely to fetch a higher rental income as well as worth escalation because these areas are sought after by people with deep pockets. Therefore, it is imminent to choose the geography carefully before buying a property.
Infrastructure: When you make an investment in residential or commercial properties, also check for the physical infrastructure available. In case of apartment complexes, see if there is security, uninterrupted power supply and power back up, adequate water availability, proper drainage and waste management processes, proximity to public transport, conditions of roads, and overall safety in the area. You should also see if the pollution levels in the area are not high and the traffic is low. In case you have children or plan to have, then it makes sense to invest in a home which is closer to educational institutions and hospitals.
Investments in real estate need not solely be in residential properties and can be in other options listed in the article as well. Real estate is surely an asset class which also provides tax benefits apart from decent returns on investment. Do your research and go for it!
The author is CEO & Founder, Right Horizons
Credits Financial Express