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.
It costs a lot of money - the minimum investment amount isn't usually affordable
Leverage is often used - so there is a financial and mental cost associated with this
Price appreciation can be tricky because of a high number of uncontrolled factors (surroundings, development, perception)
The buying and selling process can involve several layers and additional costs (builders, brokers, taxes)
Rental yields are pretty low in India
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
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.
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.
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)
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.
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
30-50% return on investment
~10% statutory charges on sale, renovation costs
2.5-5% rental yield
Expenses of 35-60% on operating income
1.25-1.5% Expense ratio
5-7% dividend yield, total return of 12-20%
1-2% Maintenance fee
8-12% rental yield
1% property management fee, 10% of capital appreciation above benchmark (ex. 8%)
Advantages and Disadvantages
Takes just 4-8 months Availability of leverage Tax benefit on interest paid on loan
Capital intensive Cyclical risk, property might remain unsold
Consistent monthly rental income Tax benefit on rental income Inflation hedge
Maintenance and upkeep takes up time Hassle of tenant management
Easy portfolio diversification Managed by professionals
Investors cant decide which companies/properties to buy Lack of true ownership
Ultra-small ticket size Steady dividend income High liquidity
Traded on exchanges leading to market risk Few options available in India
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.