The decision to invest in real estate is generally considered a safe bet. But, like every other segment, this sector also has its highs and lows. Many investors minted money in the residential real estate sector during the boom period while a few of them exited the market with nominal returns when the market busted.
The decision to invest in real estate is generally considered a safe bet. But, like every other segment, this sector also has its highs and lows. Many investors minted money in the residential real estate sector during the boom period while a few of them exited the market with nominal returns when the market busted. All speculative markets, including equity and real estate, are cyclical in nature and involve certain risks. Not all asset classes perform well in the dynamic business environment. However, without risk, there is no opportunity to earn higher returns that can help one grow one’s wealth in the long term.
Following are some things to keep in mind while investing in the Indian realty sector:
Gain in-depth knowledge about the local market:
While any buyer cannot predict the future, there are numerous ways to analyze the past and make some informed assumptions as to what the future holds for the real estate market. The realty sector typically moves in four market cycles:
• Phase 1: Recovery – The market recovers from the downturn and begins to move northwards.
• Phase 2: Expansion- In this phase, new property is launched to cater to the rising demand. Many speculators wait for this period to reap maximum gains and profit from their investments.
• Phase 3: Hyper supply – The market is very bullish with skyrocketing prices, mass developments by developers, and everyone is interested to park one’s surplus funds in the sector.
• Phase 4: Recession – The promises made by developers in the 2nd and 3rd phase are broken due to cash crunch, increase in unemployment, reducing rents and increased vacancy. However, this phase provides an end-buyer an opportunity to get better deals and buy a home at realistic prices.
“In most strong real estate markets, reduced supply leads to increased demand and that is still the case today in some parts of the market. However, today’s market is much different than that in the past. There is huge supply vs. low demand, that has compounded the problem. So, one needs to understand the market he/she is investing in,” says Avnish Yadav, Deputy General Manager, Residential Services, Colliers International India.
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Property taxes are another aspect that can influence property investments. While buying a piece of property with a motive to resell or rent it out, one should remember that profits arising from the sale or monthly rental income generated from the property are taxable. The yardstick here is how one earns from the investment post the deduction of taxes. As property taxation laws often change without warning, one needs to be aware of the current property taxation laws and determine the post-taxation cash flows to calculate the real value of the property investment in the long run.
One of the most important parameters to take into account while buying a home is the growth potential of the location that can make or break the investment efforts. One needs to understand economic or social indicators to understand whether the property prices will increase or remain stagnant. “Another factor that has a cascading effect on the property prices is the demand and prevailing rate of return in a particular location. In simple terms, the demand represents the current value of the house. This value is built over time as the market value of the property appreciates. Fundamentally, one should invest in the location having good social infrastructure, adequate public transport and economic activity,” says Yadav.
People who make property investment for the short term are known as speculators while long-term property investment is done by forward thinkers with an objective of buying property at low prices and selling it a higher rate. “Investment in real estate is often considered as a low-risk and secured investment that offers better returns in the long run. With less volatility in the real estate sector, monetary triumph is achievable as capital grows with the increase in value of the property along with regular income generated through renting and enjoying tax benefits in the long term. Thus, long-term perspective on property investment will help one to get maximum capital appreciation,” informs Yadav.
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Seek Professional advice
To make a successful property investment, one can seek professional advice from real estate advisors in order to be aware of the real estate happenings and market movement. One should also make oneself aware about the real-time events in the market. The real estate advisors are immersed with updated rules & regulations, laws, contracts and practices that can help one to make an informed decision w.r.t. to property investment.
To summarize, investment in real estate is a time-honoured method of gaining financial success over the long term. Unlike other asset classes, buying a property should involve a lot of circumspection and forethought to get maximum returns and avoid financial setback from a wrong decision. As investment in real estate should not be a casual decision and one should conduct proper due diligence keeping in mind all the factors before making the purchase decision.