Investing in Real Estate

Learn how you should invest in real estate.

Real estate is fast becoming an important part of an investment portfolio. It is a real asset and comes closest to offering fixed income returns, and it's doing that better than financial fixed-income instruments. There is also the upside of possible capital appreciation if you get in at the right time and at the right location.

Is this the right time to invest in real estate? And is it just location, location and location?

Which of these plots do your aspirations fit in? Did the thought of buying real estate come to your mind in the past six months? It must have. After all, this year offers mouth-watering recipe of the lowest interest rates and never before variety of construction all in abundant supply. It's matter of how much money you can invest.

There are all kinds of investors in the market - from upper middle-class people who are looking at shelling out about $1 million to high net worth individuals who want to plant $100 million. No wonder then that the supply is fragmented and the way about in each of these sub segments is different.

If you are a high net worth individual - then investing in real estate commercial property would obviously be your best option. Not just because you would have the money, but also because you would have access to consultants, advocates and brokers to help you manage your large investment. You also have the option of diversifying your portfolio by investing in properties spanning the commercial, retail and residential segments.

If you are a budget warrior you will be plotting things differently. You may, for example, look at investing in a 200-sq.ft-shop space in a prime locality to let out to a bank for an ATM. Top banks would be willing to pay a great amount for the lease. You can also open out your options by pooling money. That's now a strategy adopted by several investors.

If you are looking at a steady income from property, think of options in commercial and retail spaces, where you can get average returns of 10-12%. And even if you want to buy residential property and live in it, now is probably the best time to buy. As an investment, residential property is likely to fetch you yields of only 5-7%. As you will see later, investing in residential spaces needs a different mindset.

The risk profile of a real estate investor lies somewhere between those of the debt and equity markets and so do the returns. The risk profile in real estate is closer to that in fixed income markets than the one in equity. And it is likely that real estate returns will fall gradually from the current level, in line with declining returns in bonds (over the last two years). Another reason for the difference in rates is the lack of adequate and timely information.

Whichever investment philosophy you subscribe to, you cannot deny the spring in the market. It has started to pickup after a prolonged slump. It is said that real estate follows a 5-7 year business cycle, but only hindsight can verify that.

The best one can correlate is that real estate reflects the general state of an economy. If the economy is going to do well, then so will real estate. This time what gives it strength is that the market is driven by end user demand.

Next we will learn investing in commercial spaces.