The Smart Girl’s Guide to Finance: Investing in Real Estate

We put together a handy guide on alternative investment options in real estate and how to navigate the process of buying property prudently 

If you won a giant lottery today, what would you do with the money? There’s a good chance that you’re already imagining that luxurious holiday home with all the perks attached. Or a holiday in the Bahamas, perhaps? 

For most, buying their own home or real estate is the ultimate dream come true. If you can afford it, you’re putting down good money for an asset you hope will appreciate with time.  

To be sure, real estate emerged as a lucrative investment opportunity in 2022, according to a study by NoBroker.com, a tech-based real estate platform. The study, titled ‘Real Estate Report for the Year 2022’, noted that while 82 per cent of respondents wanted to buy property for end-use, 18 per cent indicated that they wanted to buy property as an investment. This trend was driven by several factors, including robust long-term capital appreciation and improved rental yields. Moreover, 71 per cent of respondents indicated that they would prefer to invest in real estate over other investment instruments such as gold, SIP/stocks or Bitcoin. The outlook towards buying a home in 2023 was positive, with 77 per cent of respondents indicating that they are looking to buy a house next year.

“Indian real estate, in 2022, has been an exciting space. Buoyed by favourable tailwinds, the sector overcame the inertia of the past several years to achieve record growth. 2022 saw record high capital appreciation and rent inflation,” shares Saurabh Garg, co-founder and CBO, NoBroker.com. The report was conducted by combining data of 30 million users with survey responses from 26,000 customers across Bengaluru, Mumbai, Pune, Chennai, Hyderabad and Delhi NCR. 

For those who don’t have that kind of money tucked away, or the appetite for risk, there are alternate investment options in real estate which are affordable, low in maintenance and easy to liquidate. The added bonus? They don’t involve dealing with pesky tenants, bug infestations or leaky pipes. 

Real Estate Investment Trusts (REITs) 

A Real Estate Investment Trust (REIT) is a good option for people who want to dip their toe in the real estate pool, but don’t have the money or stomach to buy or manage a physical property. Typically, a REIT is a company that owns, operates or finances income-generating real estate. Modelled on mutual funds, REITs pool the investment of numerous investors and then invest it in real estate. Investors buy units in the REIT, and earn returns in the form of dividends and /or capital gains. They get to do so without having to buy, manage or finance any physical properties themselves. 

Given that REITs are highly regulated in India, they make for relatively safer investments, says Vishal Dhawan, CEO and founder of Mumbai-based Plan Ahead Wealth Advisors. They also offer a good source of regular income for investors, including those who are retired or don’t have a regular source of income. This is because they are required by regulation to pay out much of their profits to shareholders as dividends. “Moreover, they are very liquid as they are traded on the stock market. One would buy and sell REITs the same way as you would buy and trade stocks. So, in that sense, you don’t have to wait to find a buyer or go through paperwork to liquidate your investment,” says Dhawan.

There are different types of REITs one can invest in. Most  of the REITs you can buy in India tend to invest in commercial and retail real estate spaces.  You can access international REITs through investments in real estate mutual funds. 

Real Estate Mutual Funds 

Real Estate Mutual Funds are a great option for investors looking to diversify their investment portfolio. Much like REITs, they also offer investors a way to access real estate without the pressure to own, operate or finance the physical properties. Real estate mutual funds typically invest in REITs and stocks of listed real estate companies. Investors earn returns in the form of dividends or through share appreciation. These are also easier to sell as compared to a physical property. 

“In general, while REITs can provide a steady source of income through dividends and/ or capital gains, real estate mutual funds create much of their value through appreciation, making them attractive for longer-term investors,” says Dhawan, who recommends that investors look at a 10-year investment horizon to see appreciable returns.

Interestingly enough, real estate mutual funds typically invest in international REITs. In turn, these international REITs invest in more diversified assets in real estate. This could include investments in real estate including residential, student housing, industrial parks, storage beyond commercial and retail real estate. “When you’re buying and renting out a physical property in a particular city, lack of occupancy or a downward trend in that locality could mean loss in income and return on investments. In the case of REITs, the investments are relatively better protected as the investment is diversified across different types of properties as well as geographies. So even if one city or geographical area is facing a real estate slump, your investment could still be better off,” explains Dhawan.  

Buying physical real estate

The most traditional or conventional method to buy real estate is to invest in a physical property–this could be residential or commercial. While this is the most preferred form of investment in real estate, it requires a large investment at the beginning and other incremental costs which could range from stamp duty fee and brokerage fee, to property tax. The cost of real estate ownership can be quite high on an ongoing basis. Thus, it is prudent to assess all the factors before taking the final plunge:

1. Pick what is right for you:

Your investment in physical real estate should be carefully thought through and researched. Those looking to live far away from the city or want a home with large open spaces could consider buying land to build on or invest in previously plotted gated community options. On the other hand, people who prefer to be close to their workspace, want their children to have other kids to play with, prefer the social structure that comes with apartment living, could potentially prefer to buy apartments, says Dhawan. It is also prudent to research the property–this includes the reputation of the construction firm and their track record, the age of the property, the materials used, the amenities on offer, accessibility to transport, as well as the area the property is located in. The proximity of the property to open spaces, schools and hospitals is also important and can influence the value of your investment.

2. Check the title:

The title and papers of a property are one of the most critical factors to consider, as it is easy for someone not familiar with the process to get duped. It is  important to do your due diligence on the title of the real estate you intend to buy, advises Dhawan. Ideally, engage the services of a professional legal firm to check the property papers and authenticate them.

3. Register the property: 

It is important to register the property in your name at the earliest. Sometimes, investors have a tendency to save some money by not registering the property in their name or to defer that decision, says Dhawan, but such a move could prove costly. “There is the danger of the property being sold to multiple people, so it is important to control that,” he says.

4. Don’t take a home loan if you don’t need one:

Avoid taking a home loan just for the tax benefit that comes with it. At the end of the day, you are still paying interest on the loan. Consider it only if you don’t have any other option.

5. Negotiate:

Track market rates to get a good handle on what your investment should be. This ensures that you can negotiate a fair price, as well as negotiate certain add-ons such as parking space, furniture and so forth.

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