Sandip’s father is old school in all his investment thinking.
This is one area where Sandip does not see eye to eye with his father.
Sandip is willing to take a little more risk and invest in equities and equity mutual funds. He is optimistic about higher returns on investment in equities.
But his father frowns upon such adventurism and the father and son are often at loggerheads.
However, the situation dramatically changed after a momentous event in Sandip’s life.
Now they sit together and figure out the best way to invest their money.
Sandip’s father is no longer strongly against equities and Sandip realizes the need for a degree of conservatism in his approach.
We will tell you how that happened but before that let us add some context.
The Old Way vs the New Way
Traditionally, investing in India meant only two ideas from time immemorial.
Simply put, you either invest in gold or real estate.
People who are too risk-averse usually stick to bank FD and gold. Investing in properties appears cumbersome to them.
However, in recent years, this has completely changed.
Retail investors in India have massively gained by taking advantage of the growing Indian economy through various mutual fund schemes.
In fact, the SIP way of investing has completely changed how common people look at investing.
There is surely a need to diversify investments with various asset classes such as gold, real estate, and fixed-income instruments like bank FD or bonds.
This is what Sandip has been trying to tell his father but without much success.
However, Sandip’s wife, a banker by profession, could bring them to a common ground.
In this article, we will discuss the pros and cons of adding real estate to your investment portfolio.
Keep reading.
Investing in Real Estate
When a common man hears the phrase ‘property investment’ he looks the other way. He is sure it’s only for the ultra-rich and not for him.
But that has changed too.
Nowadays, you can invest in real estate even if you have a modest capital.
We will discuss the ways here.
Let’s go.
Investing in Land
This requires considerable effort to identify the right opportunity. Additionally, you need to undertake comprehensive due diligence regarding all the legal aspects.
Obviously, it is difficult to invest in land in a city like Kolkata for common people and the quantum of investment is also high.
However, investing in land has its benefits.
Land requires almost zero maintenance, and you can expect good appreciation over long term. There is no depreciation of land.
One of the biggest benefits of buying land is that you can customize it for any use in the future. You can use it for poultry farming, agriculture, or constructing a house.
Investing in Properties
This is easier than investing in land.
You can invest in residential or commercial properties.
Property investment offers substantial returns on investment and is a far more reliable and steadier source of income.
Compared to other asset classes like equities, property prices are not volatile and prices usually increase steadily.
Investing in rental properties allows you to generate a consistent income stream. Moreover, rental prices can often be adjusted upwards, helping to maintain the value of your investment and your rental income stream.
Inflation tends to be detrimental to the value of one’s money over some time. Real estate can act as a hedge against inflation.
Additionally, investing in properties offers significant tax benefits. Depending on your location, you may be able to deduct certain expenses related to property ownership, such as mortgage interest, depreciation, and repairs. These deductions can significantly reduce your taxable income, further enhancing the overall profitability of your investment.
Before investing in the property market, certain factors require consideration. When purchasing residential property, evaluate amenities and the neighborhood. For commercial properties, examine tax-exempt areas, proximity to warehouses, and road and Metro connectivity. Project the area’s development during your investment period. Emphasize investments that ensure strong cash flow and anticipated returns.
Investing in REITs
Investing in Real Estate Investment Trusts (REITs) can be a great way to enter the real estate market without the need to buy or own a property.
You can invest in REITs even if you have a modest amount of capital. You can start with less than Rs 500.
REITs provide investors with the opportunity to participate in the income generated by the real estate properties owned by the REIT. Usually, any REIT owns several high-income generating properties.
These instruments allow investors to access real estate investment opportunities without the need to purchase a property. By investing in a REIT, investors can earn a percentage of the revenue generated by the REIT.
Several REITs are now publicly traded on the stock exchange, and investors can easily buy and sell REITs.
As they are under the regulatory framework overseen by SEBI, they need to submit audited balance sheets, and profit & loss accounts, and various other information. This goes a long way toward investor protection.
In short, REITs offer capital appreciation, regular dividend income, and high liquidity.
Fractional Ownership
Recently, the concept of “Fractional Ownership” has gained popularity. Investors contribute funds to collectively purchase properties through various Fractional Ownership Platforms (FOPs).
This approach is cost-effective, providing the benefits of high-end property ownership without substantial investment. Fractional ownership also yields significant returns on a modest investment.
In the last five years, several online ventures called Fractional Ownership Platforms (FOPs) have come up, allowing HNIs and retail investors to participate in such real estate investments with minimum investments ranging between Rs. 10 lakhs and Rs. 25 lakhs.
Given the traction, SEBI has notified amendments to the REIT Regulations to introduce a framework for Small and Medium Real Estate Investment Trusts (SM REITs) on March 8, 2024. With SEBI’s new regulation of fractional ownership, investors will now have the comfort of investing in a regulated asset class with higher transparency.
However, Remember This
Investing in real estate offers various benefits.
Let’s sum them up:
- Long-term value appreciation
- Rental/dividend income
- Tax savings under the IT Act
- Zero volatility in prices
- Safe long-term investment
- Hedge against inflation
- REITs offer high liquidity
Real estate investments in your portfolio offer safety, stability, and zero volatility. Considering various tax benefits, real estate offers a very high return on investments.
However, there are certain difficulties of investing in real estate.
You need to be very thorough in due diligence. It is better to take the help of a professional in this regard.
Moreover, investments in land or properties require large capital. They are long-term in nature and do not offer fast liquidity like stocks or gold. Despite these disadvantages, investing in properties is a great way to diversify your portfolio for regular income, and growth with tax advantage.
