One must begin with selecting right location and right asset. There is a need to conduct due diligence and financial analysis in the process. Stay focused on your goals and have an exit plan in place.
For any investment, the ultimate goal of an investor is to make money. Real estate is one of the preferred asset classes among investor groups across the globe due to the handsome profits attached to it. Nevertheless, it is also true that making serious money is not that easy, and real estate investment is not an exception. Within real estate, there are numerous asset classes, such as residential, commercial, land and retail. There are also various strategies to make money, such as owning and renting, buying and selling, buying shares of real estate companies, investing in real estate investment trusts (REITs), and so on. Each of this strategy involves a few basic steps like determining your investment horizon, researching the market, finalising an asset, financing the purchase and selling the property.
The key factors that define success in real estate investment are determining location/asset based on the time horizon, researching and conducting due diligence, considering all costs in the financial analysis, defining an exit strategy and setting aside a set time to pursue real estate goals.
- Selecting location and asset – The first step in any real estate investment is determining a location and then selecting an asset within that location. The investment horizon plays a key role in determining location. Generally, emerging locations need a longer time to develop, and sometimes, exit becomes difficult if development does not go as expected or as per the initial plan. Thus, if you are planning to invest in an emerging location, keep your investment horizon longer to avoid any financial distress.
- Researching and conducting due diligence – Real estate investment is also filled with potential challenges and pitfalls. With developers invariably delaying projects and delivering sub-quality products, it is very important to research and conduct proper due diligence, which involves checking a developer’s track record, quality of previous projects, financial condition, and so on.
- Conducting financial analysis –Another key to success is to familiarise yourself with tax structure, payment plans, mortgage calculation, and others. It is important to determine your personal wealth, growth prospects and the maximum amount of loan for which you are eligible. Real estate investment comes with uncertainties in terms of project completion, quality of product and exit, among others. Thus, to avoid financial distress, it is important to keep a buffer always.
- Defining an exit strategy – Ideally one should exit after achieving the targeted return on investment. Some investors choose to hold the cash flow properties indefinitely. However, it may not be the best decision for them. For example, residential properties are yielding anywhere between 2 to 4% a year in India. It’s good to hold the properties for a longer horizon but sometimes, delay in exit impact the overall internal rate of return (IRR). Thus, exit strategy is as equally important as selecting a property to buy.
- Stay focused – All the four key factors of setting goals, researching opportunities, implementing plans and financial analysis may be in vain if you do not keep an eye on changes in market trends and make adjustments to your plan accordingly. Thus, you need to set aside a time to pursue real estate goal. Investing in real estate requires proper time allocation for continuous assessment of market trends and opportunities to overcome the challenges encountered.
Given the foregoing, what matters most is taking a reasonable approach, challenging your own assumptions, learning factors that influence outcome and keeping track of where money is made and lost in your overall real estate investment.
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.