top of page

5️⃣ Ways to Add Real Estate to Your Portfolio

Indians have long fancied buying property. Its addition in the portfolio is seen as a compulsion - at least for it to be used, if not invested in. But despite the multiplied returns the asset class is known to give, there are several nuances, which make it a rather unattractive option.

  1. It costs a lot of money - the minimum investment amount isn't usually affordable

  2. Leverage is often used - so there is a financial and mental cost associated with this

  3. Price appreciation can be tricky because of a high number of uncontrolled factors (surroundings, development, perception)

  4. The buying and selling process can involve several layers and additional costs (builders, brokers, taxes)

  5. Rental yields are pretty low in India

  6. Real estate cycles can be long and dramatic

But then, just over the last decade, average housing prices have gone up by around 40%. Capital gains plus cash flow from rental yields can make this a lucrative investment option. Thanks to developments in the market, there are now easier options to take exposure to real estate.


5 Ways to Add Real Estate to Your Portfolio

  1. Fix-and-Flip The strategy of buying a house, renovating it, and then selling it for a profit. Typically, unkempt houses are purchased at a discount and then resold with a markup. When the amount of capital required is large, home loans can provide leverage.

  2. Rental Properties Purchasing a commercial or residential property and collecting rent as a landlord can be a good way to generate a consistent income from real estate.

  3. Real Estate Mutual Funds (REMF) Similar to equity mutual funds a significant portion of these funds are invested in commercial and corporate real estate, residential complexes, and agricultural land. This can be directly or indirectly through Real Estate Investment Trusts (REITS)

  4. Real Estate Investment Trusts (REITs) Funds These funds invests directly in real estate by purchasing properties and collecting rental income. Shares issued by REITs can be purchased and sold on a stock exchange just like regular stocks. In India, 80% of investments must be made in properties that can generate income, with 90% of income being distributed to investors as dividends.

  5. Fractional Investing These platforms for real estate investing are for those who want to join others in investing in a larger commercial or residential deal. Through fractional ownership, small investors can own actual physical real estate. Individuals can invest a minimum of Rs. 25 lakh in pre-leased Grade A commercial properties through online platforms such as Strata, hBits, PropertyShare, bhive, and others.

How the Cost-benefit Stacks Up

Tool

Returns

Cost

Fix-and-Flip

30-50% return on investment

~10% statutory charges on sale, renovation costs

Rental Properties

2.5-5% rental yield

Expenses of 35-60% on operating income

REMF

5-8% CAGR

1.25-1.5% Expense ratio

REIT

5-7% dividend yield, total return of 12-20%

1-2% Maintenance fee

Fractional Investing

8-12% rental yield

1% property management fee, 10% of capital appreciation above benchmark (ex. 8%)

Advantages and Disadvantages

Tool

Advantages

Disadvantages

Fix-and-Flip

Takes just 4-8 months Availability of leverage Tax benefit on interest paid on loan

Capital intensive Cyclical risk, property might remain unsold

Rental Properties

Consistent monthly rental income Tax benefit on rental income Inflation hedge

Maintenance and upkeep takes up time Hassle of tenant management

REMF

Easy portfolio diversification Managed by professionals

Investors cant decide which companies/properties to buy Lack of true ownership

REIT

Ultra-small ticket size Steady dividend income High liquidity

Traded on exchanges leading to market risk Few options available in India

Fractional Investing

Exposure to quality commercial real estate Ticket size suitable for average investors

Lack of regulatory clarity Companies providing service are new and relatively unknown

Which One to Choose?

We love REITs for their ease, structure, liquidity and ticket size. Although real estate mutual funds also provide similar benefits, a steady dividend income adds a robust layer of visibility of returns on to REITs.


Investing directly in properties either for capital appreciation or for rental yields is something we are averse to recommending, unless you understand the real estate market well and have a tonne of money to be able to only allocate a part of your portfolio to real estate despite the large ticket size.


We aren’t too fond of fractional investing. Although the proposition sounds promising, it being unregulated so far is a put off for us.

15 views0 comments

Commentaires


bottom of page