Understanding Real Estate As An Asset Buy

Understanding Real Estate As An Asset Buy


Rohit Garodia
Managing Partner, Pecan Reams

There are various reasons why a person may invest in property, ranging from a need for self use to investing with a long-term perspective. Rohit Garodia, Managing Partner, Pecan Reams, highlights the various triggers that drive property purchase and sale

A real estate asset is purchased typically as a home or office for own use or it may be purchased for the future. It could even be just an investment to park funds in order to reap rich rewards at a later date. Let us examine these driving factors in detail:

Home or Office for Own Use
It is never easy to build a home in Mumbai over one lifetime, they say. But while buying a property, the focus should be on buying something you like and want to use rather than settling for the best possible price. This is important as the spending on purchasing property is a large percentage of the total net worth for most people. This is part of a net worth that is typically not available for any alternate use and is money locked in. Selfemployed or business persons often allow their personal property to be mortgaged for monies they borrow for business. This should be avoided.

Typically, a home or office for own use is never sold. If sold, it is done as up-gradation after having been bought originally to live in. This is probably the best time in the last five years to buy a property for own use as prices are low, the government is offering sops, home loans are at their cheapest levels, and developers have lucrative options. With RERA creating transparency and payment options available, the risk of investing in an under-construction asset and delays in completion have largely reduced.

Property Purchased for Future
This is typically done keeping children or future needs in mind. These are properties where one has planned long-term ownership or use. This is not really an investment. This is also long-term money invested in a property that will not really get liquidated or be used to sell and reap a profit. This would be a way for people to park money for future use.

Purchase for Investment
Real estate as an investment class is buying property to make money on it or gain particular returns on it. This can be segmented into:

Land: It is often said that land will always appreciate because god has stopped making more of it. Owning land has been seen as the best way to make real estate investments and may continue. People buy in acres and then sell in square yards or square feet. They may buy as bungalows and sell as individual floors in a building. Liquidity is harder as it takes time to exit, but the growing Indian infrastructure and the lower prices make a lot of sense for people to buy land.

Rental Commercial Property (Shops or Offices): A great investment class for stable rent returns, this offers a welcome substitute income. Rental income becomes an option after investing for own or future use. It does come with the risk of renting out a property, working along with the tenants, managing the property and rent collection. Modernday REITs have become a good alternative way of ownership of rental assets. The returns are also similar to the direct ownership of properties – no hassles in property management with great returns.

Residential Property: Residential real estate either completed or under-construction is not priced in a manner where one can expect massive appreciations.

Completed Property: In the case of commercial properties, there has been a dip in the prices. However, returns on completed property are not high since residential rentals are in the bracket of 1.5-3 per cent per annum.

Under-Construction Property (Residential, Office, Retail): Prices have dropped at an average rate of 5-20 per cent depending on location, product, developer, and associated factors. One should not expect short-term returns but there could be natural increment in price as a project gets completed. Overall, this is a good time to buy. The current property prices make completed or under-construction residential property a very good avenue to park money gains from equity markets.

 

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