The new age Real estate for the small investors
Real Estate as an asset class: how it has reigned the minds of Indians for decades; how the heterogeneous nature of its value is prominent today; innovative products like fracassets makes sense for the new generation. A para can be on the pros and cons in terms of rental yield, monetisin\\g future income thru this asset, a real asset. While being large ticket size (concentration risk), price anchoring at time of selling, liquidating issues, cash component in price; location specific growth potential.
Real estate as an investment class
Historically, Indians have preferred physical assets over financial planning tool ie., real estate and gold over stocks and mutual funds.
The major reasons for preference for real estate over other asset class are following;
Limited expertise required and prolonged historical bias
Real estate investing is no rocket science. It has been going on for ages and it has an active market of buyers, sellers as well as agents to support the transaction.
Compared to this, stock markets require expertise as well as it is as old as 40 years in India, hence limited exposure, and participation of people.
Regular cashflow
Real estate provides regular rental income to the owner, generating consistent as well as less volatile cash flow. It provides the opportunity of flexible asset and wealth management
Capital appreciation
There are well-known statements by multi-millionaire real estate investors: “Ninety percent of all millionaires become so through owning real estate” – Andrew Carnegie. “Landlords grow rich in their sleep” – John Stuart Mill.
Wealth creation and price appreciation compound over a long period and such can be seen in real estate as well.
Physical nature of the asset
Historically, investors preferred assets that they could see, feel, and touch. Hence, the preference was higher for real estate and gold over paper assets like gold and mutual funds.
Real estate financing creates leverage benefits
Real estate is usually purchased with the assistance of a substantial mortgage, typically in the range of 70-80% of the purchase price. This means that any returns from the property are magnified by the amount of this debt. For example, if you use a $50,000 down payment to acquire a $300,000 rental property and then earn $25,000 per year from it, you have generated a return of 50% on your $50,000 down payment – because so much debt was used to fund the purchase.In addition to this, a property is considered more than an investment option in India and has an emotional value attached to it.
What are the some of the drawbacks of investing in real estate?
Large capital requirement
Real estate typically requires huge capital to start with. One of the challenges with real estate as against exposure to stocks and mutual fund is the amount needed to get started. With stocks, you can typically start with a minimum INR 1,000 as well. As against this, for a real estate property, you need few lakhs to begin with, depending on the location and demographics of the region.
It requires maintenance cost
There are additional costs of maintaining the property as you may not be sure how your tenant would have exploited the property.
Illiquid asset
Real estate investments tend to be illiquid as you can’t sell off your property as quickly as you can do it for stocks and mutual funds. The sale may undergo multiple rounds of negotiation and final agreements and conclusions. Hence, there are illiquid investments.
Real estate income is subject to taxation
Ongoing income from real estate, as well as gains from the sale of property, are all subject to state and federal income taxes – which can be substantial.
New-age real estate
To overcome the drawbacks of traditional investing in real estate, there are new-age products for smaller investors to gain exposure to the real estate asset class.
Fractional ownership assets
A lot of new-age investment products through wealth management advisory services are now available offering fractional ownership to physical assets through an alternative route. Fractional ownership is a way for small investors to own physical real estate through an alternate investment route
Examples : Embassy Business Hub, Bangalore ; Whitefield Tech Park, Bangalore; Mindspace Business Park, Hyderabad
REITs
A real estate investment trust is a company that owns, and in most cases operates, income-producing real estate. REITs own many types of commercial real estate, including office and apartment, warehouses, hospitals, shopping centers, hotels and commercial forests.
Examples Brookfield India Real Estate Trust, Embassy Business Park REITs
Benefits of new-age real estate investment products
Low ticket size - Access to high-quality assets with low ticket size. The minimum investment amount is between INR 10,000 to INR 15,000.
Convenience - Distinctive data insights of every property, remotely accessible at any given point
Attractive returns - Rental yields of 8-10% and targeted IRR of 12% over 5 years
Hassle free ownership – Turn-key management, rent collection, and property maintenance by our experienced team.
Improved liquidity - Enjoy seamless exits and continuous price discovery so you always know what your assets are worth
Transparency - Access to all data and information for easy and secure transactions
In addition to all the above benefits, these funds are managed and operated by wealth management consultants after doing the right evaluation, due diligence, data-driven analysis etc. The success rate of such investments is much higher as compared to the analysis by any retail investor.
Further, as an individual investor, you may be able to invest in one or two properties because of large ticket size. This leads to increased concentration risk. REITs and Fracassets allow you to invest in a single fund, which further invests in multiple properties.
Think of it as a mutual fund, but focused on real estate properties and hence, providing a benefit of diversification within real estate sector i.e. residential complexes, commercial complexes etc. helping you achieve your financial goals