Among all asset classes, real estate continues to appeal to savvy investors with its safe and stable avenues in India. If you are thinking about investing in real estate, you will come across plenty of options. However, it’s wise to choose how you invest in real estate. With the industry booming in India, forward-thinking investors are keen to channel their funds into the market.
Now, why do you think real estate investing will be a good decision? Compared to stocks, mutual funds, bonds, ETFs, and other investment options, real estate is less volatile. Most importantly, historical records reveal that the prices of land, buildings, apartments, and other real estate assets keep appreciating over time. While real estate offers impressive returns, it is not as volatile as the equity market, cryptocurrency, or forex. So, when you invest in real estate, you can comfortably benefit from the higher returns.
Owning real estate in India requires the right strategy. With a proper approach, your investment can be both lucrative and satisfying. Besides, investing in real estate brings you some strategic advantages. Unlike bonds and stocks, real estate provides an intrinsic value of the asset since you can leverage your property and use it as home equity. Besides, you have the opportunity to put your property on rent. The possibilities of real estate investments in India are immense.
When you buy a new home through bank financing, you need to make a down payment of 15% to 20%. However, in some cases, a down payment of just 5% can give you access to the property. To make your real estate investment a fruitful one, it’s imperative to choose the right investment strategy.
In this guide, we have discussed the five best ways to invest in real estate in India. Depending on your experience in the industry and capital, you can choose from these tactics.
Here are some of the most effective real estate investment strategies for you to check out.
In India, renting out properties has been a traditional way to capitalize on real estate investment. Once you purchase a residential or commercial property, you can use it commercially by putting it on lease or rent. This brings in a consistent flow of rental income every month.
Renting out your property in India can be a fruitful real estate investment. Besides enjoying a regular cash flow, you can take advantage of long-term capital appreciation. Consistently, you can earn passive income by simply maintaining the property in a habitable condition.
The income earned through rent can be used in other investment avenues. Savvy investors accumulate this rental income to purchase other properties, which they put on rent again for additional income. With a regular income through rent, investors can get a hedge against inflation. Over time, property rates tend to increase.
Over the long term, real estate value tends to appreciate. Thus, you can build your equity in properties to accumulate substantial wealth. It’s wise to consult real estate industry experts to identify areas where rental properties are in high demand. Developing cities or rapidly developing localities in metro cities are popular choice for real estate investing.
Do you know that you can qualify for certain tax advantages on rental income from these properties? Think of your annual expenses on the property you rent out. These include maintenance, repairs, and mortgage interest payments, which qualify as tax-deductible. This significantly reduces the overall tax liability on your rental income. As an investor, you can also benefit from depreciation deductions.
However, take note of the potential challenges and drawbacks of investing in rental properties. When you own multiple properties to rent out, tenant management and property maintenance emerge as the key hurdles. For instance, you may have to deal with tenant disputes, property repairs, or look out for new tenants on vacancies. This can turn out to be a time-intensive affair, particularly if you are a working professional or reside overseas. The best approach to deal with such challenges is to hire a property management company.
Although you earn rental income, this can vary according to market fluctuations and economic conditions. For instance, periods of economic downturn or oversupply in the rental market can lead to lower rental rates. This impacts the overall returns and cash flow of the investor.
Pros
• Property value appreciation along with regular income
• Leveraging property maximizes capital
• Tax-deductible benefits are applicable
Cons
• Tenants can potentially damage property
• Managing tenants can be a challenge
• Potential vacancies can reduce income
If you are looking forward to investing in real estate, exploring REIGs (real estate investment groups) will be worth it.
You know how hectic property management can be. If you want to capitalize on the lucrative opportunities in the real estate industry without bearing the pain of property management, REIGs will be a great option. REIGs are similar to small mutual funds. These groups pool capital from investors to acquire rental properties and manage them. Thus, you enjoy a hands-off approach as you make real estate investments.
If you want to participate in a REIG, it needs capital investment and financing. Under this mechanism, investors need to purchase units or shares of self-contained living spaces developed within condos or apartment blocks. These properties are collectively managed by the REIG company. Individuals following this model can own a stake in several properties, while the company takes care of the operational duties.
REIGs appeal to real estate investors in India since they have the potential to generate regular income. Besides, you enjoy the privilege of property value appreciation. Most importantly, you need not manage the rental properties directly. The management company takes care of the maintenance, advertises vacancies, screens tenants, and carries out necessary repairs. They even deal with tenant disputes, in case they arise. In return, the REIG company charges a certain percentage of the monthly rent as management fees.
The reason many people invest in real estate through REIGs is that, these groups reduce the risk of vacancies through the rental income they pool. Even if certain units remain unoccupied, investors continue to receive a part of the overall rental income. This serves as a cushion against income fluctuations.
While investors enjoy several advantages by working with an REIG, this mechanism comes with some inherent risks. During economic downturns, the risk of vacancies persists, particularly in saturated rental markets. This can affect the overall return of the group.
Moreover, investors should be vigilant about the management fee, which can potentially erode their income over time. It’s important to work with the right REIGs, as you may land up on a fraudulent company running an unscrupulous scheme. This explains the importance of due diligence before making any kind of real estate investment.
Pros
• A hands-free approach to renting out properties
• Benefit from regular income and property value appreciation
• Rent out multiple units at a time
Cons
• Property management risks can be high
• Properties might remain vacant
• Unscrupulous managers continue to be a risk
If you are experienced in real estate investing and want to take some risk for quick profits, you may try your hands at house flipping. This type of real estate investment is dynamic in nature. It requires expertise in understanding property value, marketing, and renovation. Typically, seasoned investors in the real estate market in India undertake this strategy.
The process of house flipping involves purchasing undervalued or distressed properties. Next, you need to renovate them and sell them off for a decent profit. The entire process takes place in a relatively short timeframe. However, failure to sell off the property quickly can lead to further value depreciation, leading to a loss. This explains why individuals experienced in real estate investing usually take this risk.
House flipping is different from traditional buy-and-hold investments. In this case, you need to identify properties with untapped potential. If you manage to carry out renovations quickly, the potential for profit looks decent. Successful house flippers have a deep understanding of the local market and real estate trends. With adequate information and an understanding of property values, you can make the purchase decision.
Under house flipping, there are two main approaches: pure flipping and value-added flipping through renovations. Pure flipping is all about purchasing properties with existing value that you can sell off for a profit without carrying out significant renovations. On the other hand, value-added flipping involves some renovations to improve the property value before you sell it off.
Although house flipping happens to be a popular form of real estate investing, flippers need to manage their finances and timelines tactically. Prolonged holding can lead to additional costs and potential losses. Besides, failure to sell off a flipped property can financially strain you when you don’t have enough contingency fundsto cover mortgage payments and expenses.
Also, house flipping requires a deep understanding of renovation costs and market dynamics. A careful evaluation of renovation expenses and market conditions can help you capitalize on such opportunities. With the right approach, you can make a sizable profit in a relatively short period.
Pros
• Your capital gets blocked for a shorter period
• Returns can be significantly high
Cons
• Deeper market knowledge is necessary
• Risky investment as hot markets may unexpectedly cool
Real Estate Investment Trusts (REITs) are a lucrative avenue for real estate investing. When you seek exposure to real estate assets without getting engaged in property transactions directly, go for REITs. Real estate investment trusts work similar to mutual funds. They pool the capital of investors to acquire properties that potentially generate income and manage them. This brings you the potential to earn dividends and benefits from the property value appreciation.
REITs can be purchased from major stock exchanges since they work as publicly traded corporations or trusts. This brings you the opportunity to invest in real estate assets through shares that can be traded on the market. Companies need to distribute at least 90% of their taxable profits to shareholders to maintain their status as an REIT. Compared to traditional corporations, REITs enjoy certain tax advantages.
When you think of investing in real estate to earn a regular stream of income, it’s wise to go for REITs. They are similar to stocks that pay dividends. Investing in REITs, you can consistently earn dividends as the property portfolios generate rental income. Besides, you have the scope of diversifying your investments into commercial assets such as office buildings and malls. Due to the high costs of these assets, individual investors may not be able to own them.
While the lack of liquidity is a potential drawback of real estate investment, this is not the case for REITs. Since they are traded in an exchange, you can buy and sell shares without experiencing the complexities involved in direct real estate purchases. Thus, investors enjoy better flexibility when it comes to managing their investments.
If you decide to invest in real estate through REITs, it’s crucial to differentiate equity REITs from mortgage REITs. Equity REITs primarily own and operate income-producing properties. Thus, investors get ownership stakes in their real estate assets. Mortgage REITs, on the other hand, focus on real estate financing. They may invest in mortgage-backed securities, providing exposure to mortgage income streams.
Although REITs come with several advantages, they have their limitations as well. They lack the leveraging instruments available in traditional rental real estate. If you are willing to diversify your portfolio, including REITs will be a viable move.
Pros
• The potential of earning through dividends
• No hassles of owning or managing properties
Cons
• No real estate equity as available in owned properties
Also Read | Unlocking Investment Opportunities: Crowdfunding Real Estate in India
5. Online Real Estate Platforms
Also known as real estate crowdfunding platforms, online platforms for real estate provide a viable way for investing in real estate. This is a relatively modern approach, where you can participate in larger property deals along with other investors. If you are willing to diversify your portfolio without investing the entire capital necessary for direct ownership of the property, crowdfunding platforms may be your choice.
These platforms allow real estate investors to choose from a wide range of investment opportunities. This can span a single residential or commercial project, or a portfolio of projects distributed across different locations. This potential for diversifying your investment dilutes the risk, as you can gain exposure to localized real estate markets.
One of the primary benefits of real estate crowdfunding is the increased accessibility to a larger pool of investors. When you pool resources, you get access to larger projects that may not have been otherwise accessible due to fund constraints. Thus, investors can put their funds in high-value projects reserved for institutional investors.
One of the other perks of real estate crowdfunding is the flexibility to tailor your investments based on your risk tolerance and preferences. Investors enjoy the privilege of choosing projects based on location, category, expected returns, and duration of the investment. This ensures better control over the portfolio.
However, investing in real estate through crowdfunding comes with its drawbacks. Such investments are less liquid compared to publicly traded securities. The lockup periods can restrict the ability to withdraw funds before the investment term is over. Besides, investors should be aware of the management fees that the platform charges. This can impact the overall returns you get.
Pros
• You can invest in portfolio projects or a single project
• Investors can Geographically diversify their funds
Cons
• Lack of liquidity with lockup periods
• Management fees can be high
Conclusion
Now that you are aware of the different ways for investing in real estate, choose the right avenue for consistent returns. Even if you lack funds, strategies like investing in REITs or online crowdsourcing platforms can help you get started with real estate investments. A careful consideration of your risk tolerance and appetite can help you choose the best way to invest in real estate. Look out for profitable markets in India and invest in the property market for lucrative returns.
FAQs
Considering the strong market, you can invest in real estate in cities like Delhi, NCR, Mumbai, Bangalore, Hyderabad, Pune, Kolkata, and Chennai.
Real estate is a safe asset class that can stabilize your portfolio. It isn’t as volatile as stocks or mutual funds. However, investing in real estate can fetch you a steady income over time. Property value appreciation ensures that you can benefit from the returns in the coming years.
In direct real estate investments, you own and manage the properties directly. On the other hand, indirect real estate investments involve investing in pooled systems like real estate crowdfunding and REITs that own their properties and manage them.
Real estate crowdfunding can be riskier compared to other forms of investing in the property market. Crowdfunding is relatively new and some projects seek crowdfunding as they failed to qualify for other means of financing like bank loans. Besides, your money may be locked up for several years.
