Investing in Residential Spaces

Learn how you should invest in real estate - residential spaces.

IMost investors in residential property plan to use it for themselves somewhere down the line. That's how most investors think. The rental yields, at 4-6%, are half of what you would get from a commercial property. Capital appreciation isn't a strong point. And demand is being met by a robust supply of quality construction.

This would hold true across geographies. So for the purpose of investment, you should choose by location and other factors that may make a property unique. Why would somebody pay a premium to buy your property five years from now? That's the question you need to answer. But beware, uniqueness may also fall out of favour with future investors.

You may also look for deals inside the main city, though everyone is talking about the suburbs. That's because supply is likely to stay more or less fixed in the main city, unless some is thrown up redevelopment, as in cities like New Mexico.

The reputation of the builder is very important here more so if the project is still being constructed. What recourse would you have if a builder sells you a dream on paper and you come to see that the end product is a nightmare? One market observer reported that one builder was in such a hurry that he advertised for a residential project that had not even reached the drawing board! With so many builders vying for your attention, you have a good reason to be all that more careful.

Or you could invest in a plot of land. Even if you go slightly wrong in terms of the location, you can expect more-than-decent capital appreciation. But be sure you aren't looking for the regular returns of a rental arrangement right away. Getting a plot in a government scheme may be like winning a lottery, but there is a thriving secondary market in plots. Speaking to a couple of real estate brokers would give you a fair idea of the supply in the area of your choice.

But within the overall supply glut, one could land good investment opportunities in micro markets. People investing in prime residential properties in upcoming cities can expect suitable capital appreciation over the next few years, as the supply in this category is relatively limited. And it would make sense for residential investors who fit in below the $5 million bracket to pool in money to derive some price leverage.

Unless you choose carefully, you may not be able to find a good tenant for prime properties. You might have to keep the property vacant. In small properties, you can at least get the rental and diversify your risk by buying properties in different places. By choosing a good location and quality construction and design, you can get capital appreciation in small properties too.