What is real estate investment? Real estate is an alternative investment instrument, like the ones we discussed in the previous section. But it merits a separate mention because it is tangible. You can physically own a property and decide to use, rent, sell, or modify it. Other alternative investments are purely financial instruments. They pay returns in a predefined manner during their life and cannot be put to any other use.
This piece will tell you all need to know about real estate investing and property investment in India.
Types of real estate
There are five major types of real estate investing in India:
1. Residential – This is the most straightforward real estate investment in India. It includes houses and individual apartments that can be occupied by an individual or a family. It also includes apartment buildings where each unit is occupied by a separate tenant. Tenants pay you a pre-decided rent, usually each month. the duration of their stay depends on the lease agreement. These are generally made for eleven months and renewed on you and your tenant’s mutual consent.
2. Commercial – This includes individual office locations, office buildings, and business parks. They usually require a significantly larger investment than residential real estate. But they also attract higher rents. Commercial properties frequently have multi-year leases, which stabilizes your cash flows and increases their predictability. The only challenge is that their rents are highly volatile. They fall more than residential real estate during downturns as businesses downsize or shut down. They increase considerably during upswings as companies hire more people. So, multi-year contracts keep you from taking in new tenants and earning more rent during upswings.
3. Industrial – This includes any property that the tenant can use to produce, manufacture, assemble, store, or distribute tangible goods. Common examples are factory locations, industrial warehouses, garages, service stations, and cold storage facilities. Industrial real estate generally generates a large fee and creates opportunities to earn incremental revenue from additional services. For example, if you have rented out a car service station, you may set up a café or a convenience store on it for waiting customers. You may even offer the property on a revenue sharing basis and earn a share of the occupant’s revenues.
4. Retail – This includes shopping malls and retail stores. These properties too can be let out on rent basis as wells as revenue sharing basis. In many cases, the landlord asks for a share in the tenant’s revenue, over and above a base rent.
5. Mixed-use – This combines many of the above categories on a single piece of land. It is fit for investors who can invest in a large piece of land and develop its separate sections for different uses. it offers built-in diversification because your revenues are not tied to fundamentals that affect one type of real estate. This reduces risk.
Income from real estate investments
Most real estate investments generate income in two forms:
1. Price appreciation: This refers to an increase in a property’s value when it becomes more desirable. This mostly happens because of developments in its surroundings. For example, when a new source of employment comes up in its neighbourhood or when its metro connectivity improves. Its price may also increase because of the upgrades and improvements you make to it. Price appreciation allows you to sell the property for more than you bought it, generating a profit in the process.
2. Periodic cash flows: This is the rent you generate when you lease your property. To generate this, you must hold the property for some length of time after buying it.
Benefits of investing in real estate
1. Convenience – real estate is not as technical as stocks, bonds, and other financial assets. Many aspects of real estate investing are intuitive.
2. Tangibility – Property provides psychological comfort because it stays with you even when its price collapse. You can use it yourself or generate some bare minimum revenue by leasing it.
3. Stability – Real estate does not always generate supernormal returns like stocks. But it pays stable rent that can be increased when you renew the lease.
4. Insurance – Unlike financial instruments, property can be insured against damage and loss.
5. Inflation hedge – Property prices and rents increase with the price level. So, inflation has a limited effect on your financial position when you invest in real estate.
Real estate is regarded as the simplest investment instrument because investing in a property is less complicated than financial assets. Knowing how to invest in real estate involves a straightforward exchange between the property owner and the tenant. However, properties are of different kinds and each kind has its unique characteristics. This makes real estate investment a skill that needs to be done with expertise in order to get the benefits of investing in real estate.
Disclaimer: Investments in the securities market are subject to market risks. Read all the related documents carefully before investing.