Most people buy their own home as their first investment in property. Property can fetch you rental income and has an upside potential for capital appreciation in the long term. However, real estate projects have a long production cycle and numerous participants and stakeholders are involved at every stage of production. The consumer pays for the product in advance. The developer then utilises the funds received to produce the product. Ownership of the product is transferred after a period of time. This entire process entails the investor taking a significant amount of risk. The risk multiplies due to lack of transparency in the system. Thus it is very important for an investor to determine their purchase approach, do on ground research and assess their finances well before making a purchase. Few factors that will play a crucial role in shaping your investment decision are:
You could invest in a property at different stages like pre-construction, under-construction, nearing possession or ready-to move. People buying for investment purpose generally choose to invest at early an stage to reap the early mover advantages. Nevertheless, investing at early stage also comes with certain risk such as project delays, variance in quality, layout plans, floor plans, green area etc. In cities like Gurgaon, NOIDA and Mumbai, the projects have been facing a delay of 1-2 years. However, in certain cases it extends to 5-6 years as well. With the cash-strapped developers invariably delaying their projects in almost all major cities of India, investment at early stage of project has become a risky proposition. Most of the project in India delayed because of invariable delay in approval processes. It is advisable for an early investor to run a quick due diligence on the shortlisted projects including approvals and licenses i.e. commencement certificate for work, environmental clearance, approved building plans, allotment letter and development agreement; List of banks for financing the project; Quality of previously constructed projects by the same developer; Status of land title.
The potential property should be where people would like to live, and that can be for a host of reasons. Connectivity with the public amenities like airport, railways etc., upcoming infrastructure projects like metro, bridges, roads, monorails etc., upcoming commercial development in the nearby areas and good social life are the prominent ones .
Property investments are large ticket size investments and exit is neither quick nor simple. Thus you should always invest if you have holding capacity. The use of debt attracts many real estate investors as it helps to acquire the properties which otherwise one could not afford. You should never overleverage while buying the property for investment as the interest expense and regular payments can lead to bankruptcy. Moreover, be careful in picking between fixed rate and floating rate interest option. As in case of falling interest rate scenario, floating rate is a better option while in rising interest rate scenario, a fixed interest loan make more sense. You, as an investor, would also need to stay abreast with the interest rate scenario and that your expected net returns can be affected by a high interest rate. This in turn can affect the market for your property.
One mistake that most of the investors usually make is relying largely on the rental yield when buying property for investment purposes. If you are taking out a mortgage to buy a property for investment, never rely heavily on rental income as rents start only after completion of the project and the property may sit empty for a month or two. Factor in the outgoings pertaining to the property such as taxes and maintenance cost etc. while making a financial plan.
Do not fall in love with your investment!
You must exit at the right time to ensure high returns as delaying the exit reduces the IRR (internal rate of return). Generally, investors exit from the property at the time of possession to save on the registration costs and stamp duty. If you have registered the property it is advisable to sell only when the project becomes habitable. This is when a 10-15% appreciation is witnessed. However, many factors can affect this appreciation. Demand, occupancy ratio and amenities are just a few on the list. As an investor, you are advised to exit once you have achieved your primary objective i.e to make money.
About the author
Surabhi Arora, leads the research team in India and has more than13 years of experience in carrying out multi-disciplinary research and analysis in the area of finance and real estate industry. Surabhi specialises in real estate economics, policies, commercial and residential real estate research with in-depth knowledge of market dynamics across major markets in India.