One of the industries with the highest international recognition is real estate. Housing, retail, hospitality, and commercial are its four subsectors. The expansion of the business environment and the demand for office space, as well as for housing in urban and semi-urban areas, are excellent complements to the growth of this sector. In terms of the direct, indirect, and induced effects on all areas of the economy, the construction industry comes in third among the 14 key industries.
For NRI property investors, Bengaluru is anticipated to be the top choice, followed by Ahmedabad, Pune, Chennai, Goa, Delhi, and Dehradun. The real estate market would increase from Rs. 12,000 crore (US$1.72 billion) in 2019 to Rs. 65,000 crore (US$9.30 billion) by 2040. In India, the real estate market is anticipated to grow to US$ 1 trillion in size by 2030 from US$ 200 billion in 2021 and to account for 13% of GDP by 2025. Significant growth is also being seen in retail, hospitality, and commercial real estate, which is essential infrastructure for India's expanding demands.
An effective way to generate earnings in India is through real estate investment. But if you want to make a wise real estate investment, you can't just act on a whim. When investing in real estate, you may encounter a number of difficulties, including erratic revenue, taxes, property upkeep, navigating local ordinances, and trouble finding tenants. What kind of property should you choose if you want to invest in real estate to get better returns on your money, is the main problem and query. Commercial or residential? In order to assist you in selecting the optimal investment choice, we have examined both choices.
Why Should I Add Real Estate to My Portfolio?
Diversification: Your overall risk can be reduced by including real estate in a portfolio of stocks, bonds, and other instruments. A wise investor will diversify their holdings widely and store their eggs in several baskets. This is due to the fact that real estate typically has little relationship to stocks, bonds, or other commodities.
Tax Benefits: There are several deductions you will be able to claim for the properties you purchase while taking home loan. You can claim deduction up to Rs. 1.5 lakh under Section 80C from the amount paid as the repayment of the house loan outstanding. Under Section 24(b), you are entitled to a tax deduction of up to Rs. 2 lakhs on house loan interest paid.
Stream of Income: Real estate is a more stable and tangible asset than stocks and bonds, which are influenced by a variety of external factors such as market volatility, interest rates, inflation, government policy, and regulation. Additionally, real estate rentals and REIT/InvIT dividends guarantee a secure monthly income with little chance of interruption.
Control and Leverage: Many potential investors are drawn to real estate because it is a physical asset that can be managed. Owning a home gives you the ability to leverage it in pricey deals, which is a real advantage. Property owners can purchase additional properties even if they are unable to pay for them in full up front by using their present unit as collateral for loans.
Factors to Consider: -
Initial Expenditure - Compared to commercial properties, residential properties have a lower initial investment cost. If you are a newbie investor who does not want to take out a loan and who does not have significant money for down payments on commercial real estate, investing in residential properties would be a wise choice.
Profit from Investment (ROI) - Commercial real estate is typically far more expensive to enter, but because it provides greater profits, it is nevertheless a common kind of real estate investment in India. In India, the annual return on investment for commercial properties is between 8% and 10%. In some rare properties and areas, India's ROI can approach 13%. In the case of residential properties, the expected overall return on investment ranges between 3% and 4% annually. As a result, commercial real estate offers better returns on investment than residential ones.
Terms of Lease - While residential leases are signed for three to five years, commercial leases can last anywhere from a year to ten years or more. Because commercial tenants typically sign longer leases than residential tenants, the commercial property is a desirable investment because it is guaranteed to generate a steady income. In terms of commercial real estate investment in India, it correlates to lower vacancy rates and turnover costs.
Performance amid a Crisis of Economic - An economic downturn typically hits businesses hardest first, which can have a number of effects on commercial investment. The constant need for homes will be advantageous to owners of residential property. Even while investing in real estate in India might be profitable, there are hazards involved. As a result, investing should be done with care and diligence. To make a wise investment selection before purchasing a commercial or residential property, you should research the builder's track record, the area, and historical pricing trends.
Direct vs. Indirect
Actual property ownership and management are considered direct real estate investments. Purchasing properties through pooled vehicles that hold and administer them, such REITs or real estate crowdfunding, is known as indirect real estate.
Ways to Invest: -
The fact that there are numerous ways to invest in real estate is its best feature. Real estate investing can be done in a variety of ways. The following section discusses the five most popular ways to invest in real estate in India.
1. Residential/Commercial Rentals
Purchasing a rental property and renting it out is an excellent strategy to invest in Indian real estate and make money from it. It guarantees consistent income.
However, there are drawbacks to this investment strategy as well. When renters begin causing property damage, owning a rental property can occasionally turn into a headache. Managing certain renters and making sure rental payments are made on time can be a difficult chore.
2. Property Flipping
Flipping property can be done by those with experience in real estate marketing, valuation, and renovation. This requires money, as well as the capacity to see, comprehend, and make corrections as necessary. This may produce a quick return because the capital is invested for a shorter amount of time. Just thorough market knowledge is needed. House flipping is the practise of purchasing a home, holding onto it for a brief period of time, and then selling it (the flip part) for a profit. Flipping a home occasionally entails taking a fixer-upper and updating it so that it is ready for the market.
3. REIT
Your funds are combined with those of other investors when you invest in a real estate investment trust (REIT), which is a collective investment vehicle that makes investments in a portfolio of income-producing real estate assets like office buildings, hotels, and serviced apartments.
These assets are professionally managed, and after accounting for costs like REIT management fees and property management fees, earnings earned from assets (mainly rental income) are typically transferred at regular intervals to REIT investors. The REIT's investment objective is to produce income distribution and potential for long-term appreciation. At present there are 3 REITs i.e., Embassy, Brookfield and Mindspace.
4. REMF
A mutual fund that invests in the securities of real estate companies is known as a real estate mutual fund (REMF). These funds are largely invested in corporate and commercial real estate, apartment buildings, and agricultural property. Real Estate Investment Trusts allow REMFs to invest in real estate either directly or indirectly (REITS). Small investors that are unable to invest directly in real estate can consider real estate mutual funds. As professionals and experts manage these funds, these investors can access the sector with lower sums and be rewarded with favourable returns. Aditya Birla Real Estate Fund, HDFC Property Fund, ICICI Pru India Opportunities Real Estate Fund are few of REMFs in India.
5. REIG
Real Estate Investment Groups, or REIGs, are a good option for people who wish to own rental real estate but don't want to worry about managing it themselves. It is a business that either constructs or acquires a collection of apartment buildings, then offers them for sale to investors in a manner similar to mutual funds. In this case, the business serves as a means of exchange, and the investor joins the group. In REIGs, a person may be the owner of one or more residential spaces, but he is not responsible for managing or maintaining such spaces. Unfortunately, the market for REIG is still upcoming.
The Myth: Land prices will always continue to rise is just an assumption
The notion that property prices will continue to rise because of a lack of available land is supported by the world's expanding population. However, a detailed examination of the data demonstrates that this is not the case. Even though the amount of land on earth is limited, there would still be plenty for people to live on and prosper.
Furthermore, the fact that developing nations are experiencing an unheard-of real estate boom leads to the belief that land prices will keep rising. With prices plummeting by 40% to 50% over the past ten years, the real estate market has collapsed when compared to the economy of industrialised nations like Japan and the United States.