Real estate is one of the largest sectors in the Indian economy. Real estate has multiple sub-segments like Residential, Commercial (offices/malls etc) and Infrastructure (roads, bridges, airports, rail etc) assets.
Real estate investing offers a great way to diversify one's investment portfolio as the returns from Real estate sector is less correlated with other assets like equity and debt, hence balances one's portfolio.
There are two major ways one can take exposure to Real estate in India.
*1. Conventional Route*
Invest in Residential or Commercial properties in one or more cities.
Here, suburbs or upcoming smaller towns may be a good option considering the potentia for appreciation.
The advantages are:
- Get Tax breaks - For Principal and Interest payment
- Self-occupancy benefit
- Pride of ownership for the family
- Feeling of Safety, Security and control
- Low price fluctuation
- Long Term Capital gains Taxation (with Inflation indexation, can be set off by investing in Capital gain bonds)
The disadvantages are:
- High initial cost
- Purchase and transfer logistics and costs (registration, stamp duty etc)
- Finding tenants initially and ongoing basis
- Repairs/maintenance cost
- Property tax, Water tax, Insurance etc
- Society or building maintenance costs
- Low liquidity - Cant dispose off the property quickly due to lack of transparent price discovery
- Concentration risk (Limitation of investing in 1-2 properties in 1-2 towns, low diversification, very expensive to invest in International locations)
- Other risks - Frauds in Title deed, Tenant Encroachment, Tresspassing, Structural damages due to force majeure etc
The returns from Conventional property investing will be slow yet steady, ranging from rental income of 1% to 4% of initial investment with gradual appreciation.
*Over a period of 20-25 years, conventional real estate delivers 6% to 14% p.a returns*, net of costs depending on the invested property, whether residential or commercial.
If one has time, patience and large budget (initial investment), one can prefer to take the conventional route.
*2. Securitized (Financial) Route* (Equities and Debt)
In this model, the real estate assets or sectors / industries that benefit from real estate sector are available as *financial assets (or financial securities)* to invest.
Thru this route one can invest in *Commercial or Residential Real estate* assets by investing in Financial securities where the underlying assets are real estate properties (or) a stream of rental or annuity income from multiple properties (Infrastructure, Commercial or residential properties) (or) ownership of real estate enterprises (or) ownership of enterprises that benefit from growth of real estate (e.g, Steel, Cement, Logistics, Paint, Tiles, home finance etc)
Such securities can take the form of *Equity (Stocks) or Debt (Asset Backed (ABS) / Mortgage Backed (MBS) / Collateralized Debt (CDO), including REITs / InVITs*
This route offers excellent diversification by spreading one's investment starting from small sum of Rs. 25,000 (lumpsum) or invest Rs. 5000 monthly (SIP) into a diversified portfolio spanning:
- Multiple Cities / towns (even invest in International real estate)
- Multiple Builders / Promoter real estate assets
- Multiple Sub segments (Infrastructure, Commercial, Residential)
- Multiple Industries (Steel, Cement, Tiles, Home Finance, Paint, Facility Mgt etc)
The advantages are:
- *Very easy to manage* (from anywhere in the world, with just a mobile app)
- *Great liquidity* - Can sell or redeem part of the investment anytime, as this is a significant draw back in Conventional real estate investment
- *Pledgeable* (just like a normal property, to take loan or borrow via Loan against shares or Loan against MF)
- *Get Tax Breaks* (u/s 80C - given the investment is into ELSS category schemes)
- *Economical and cost competitive* (zero expense of repair, painting, maintenance, property tax, monthly costs, finding tenants, brokerage, registration, stamp duty etc). Just the cost of acquisition (for stocks) and fund management fees (for mutual funds)
- *Ease of Gifting and Transfer* - Can be transitioned to descendants (son/daughter) just by adding nominee details at time of investment or even later on.
- *Professional Management* - Securitized assets are professionally managed by mangement team of individual companies (or) mutual fund managers who specialize in real estate sector hence lesser worry for investor
- *Higher returns* - Both rental type of ongoing income (thru dividends or interest payment and growth / appreciation, which is nearly 1.5 to 2 times conventional real estate returns can be realized.
- Long Term Capital gains upto Rs 1.0 L is TAX FREE (for equity assets) after 1 year holding period. For investment in Debt securities treatment is similar to Conventional Real estate
The disadvantages are:
- Lack of physical touch and feel
- Fluctuation in asset prices (Stock price / Net asset values)
- Feeling of lack of control
- Tax break on account of Interest (part of EMI) is not available
As the real estate market gets more institutionalized with stringent regulations like *RERA* being implemented, investors are increasingly moving towards Securitized route to invest in Real Estate assets, as it is much simpler, has better liquidity and offers better returns too!!
Want to invest in Real estate through Securitized route?
Reach us for professional advice at *https://www.dhanayo.ga/contact.html* (or) via *Click-to-Call button* (left wall) in our our website
Sethu V, Founder of Dhanayoga. I'm a Serial Entrepreneur, Management Consultant, Value Investor and Certified Investment Adviser. Connect me at http://linkedin.com/in/venkatsethu