Investing in Homes

How you should invest in homes if you are thinking investing in real estate.

Real estate is one of the most profitable investments today, if a property is wisely chosen. For this, the investor must be aware of the sector and the achievable yields from retail, commercial and residential properties.

Returns can be expected in the short term through regular returns on leasing properties, and in the long term through capital appreciation of the respective properties after a certain period. The returns are subject to market dynamics. Unlike any other sector, the real estate market is inherently illiquid. There may not be a buyer when the owner wants to sell, and there is no central trading platform for real estate. However, investment in this sector has been growing steadily over the last four to five years, and the market is less speculative as compared to the past. Today, it attracts investments from corporates and from other individuals-high net wroth or otherwise.

If you are investing in residential property, you must seek answers to basic governing yields, such as:

Where to invest?

It is important to know the emerging residential areas. Keep abreast to trends in metropolitan property markets as indicators of trends to follow. Look out for movements of prominent corporates to a particular business destination. Also, look at emerging townships with good infrastructure as future investment options.

Legal issues:

These range from legal title verification to land-use verification. These are important, and linked to the future re-sale of the invested property, which in turn affects the returns on the property in the long term.

Taxes to be paid:

Income tax is payable on the rental revenue generated and capital gains from the sale of property. Property tax and stamp duty are also payable by the buyer and occupier, which very across different states, and affect returns on one’s property investment.

Other things to watch:

• The entry cost or minimum investment, that needs to be made.
• The liquidity time that the investor can sustain.
• The ‘affordable’ gestation period.
• The legal fees that will be incurred to protect investor’s interest.

Yield in property

This is calculated on the basis of the capitalized value of net annual rental-derived by deducting the sum of the property tax, maintenance and other outgoing expenses (if any) to the account of the landlord from the annual rent. The yield is applied on the base year’s net annul rental.

The investor should also study trends in the sector in the city he invests in. For instance, in New York, residential property prices have firmed up in the last three years. The burgeoning middle-class is young, and avails of loans at lower interest rates to buy properties for self-occupation. Developers are responding to a need for greater professionalism in providing better infrastructure.

Further, paying rent is almost the same as paying EMIs for home loans, especially with little difference in their value. So the investor should choose a location wisely to ensure that the residence will have demand for rented accommodation, being close to work areas (CBDs) or having exceptionally good surroundings and aesthetic value.

Indicate Investment Yields

The determining factors for yield on residential property include:

• The demand for rented residences.
• Role of the city in terms of the need for rented residences.
• Rise/decline in economic activities.
• Availability of rented residences
• Predominant residential typology such as bungalows and apartments.

Investing in residential property offer lesser yields than retail and commercial properties. But, it is the best option for moderate investors due to the negligible risk, affordable entry cost, least lock-in period for leasing, freedom to determine lock-in period for selling, and relatively quick and easy liquidity.