There’s nothing like finally achieving a long-due milestone right? From buying a new and luxurious home to finally buying that car or sending your children abroad to study, there are many long-term goals in our lives. Here’s a brief look at how you can possibly achieve it with the help of real estate.
Real estate has often been blamed by industry experts and market players as being an illiquid and sluggish investment. Experts point at the higher returns offered by riskier mutual funds and the steady nature of fixed-income investments. Non-proponents of real estate in the kitty also point at factors like the difficulties involved in choosing the right property, maintenance, possible losses due to market fluctuations and so on.
However, one aspect is undeniable when it comes to real estate- It has always delivered stellar returns to investors. The philosophy is just like investing in gold as many people would state. Just as gold prices may fluctuate in markets and potentially erode investment value, they always bounce back again and in fact, it has been proven that time-tested avenues like gold and property have always offered steady returns to believers.
Yet, we’re not getting philosophical here. Far from it. Rather, what we’re saying is that sticking to the basics may sometimes yield results. Real estate, in spite of the fluctuations and other hassles, ultimately proves to be a worthwhile investment on several counts.
Table of contents
Why Real Estate is Always Worth Opting For?
- It is a safe and secure investment in comparison to funds and other riskier options.
- You can earn through rental income.
- You can gain through capital appreciation.
- You can own a physical and tangible asset which adds instantly to your net-worth and secures your family’s future.
- You can function as an investor for earning future returns and achieving long-term goals from your property investments.
- There are various types of properties to choose from.
How Can You Build up for Long Term Goals with Real Estate?
Suppose you have a long-term goal like buying a bungalow or a bigger apartment in the future, sending your children abroad, covering costs of a foreign vacation, buying a luxury car and so on, you will naturally have to plan in advance. Here are some dos and don’ts on achieving these goals with the help of real estate.
- Do not put all your eggs in one basket. Diversity into fixed income investments and even some mutual funds and gold. Allocate 30-40% of your portfolio towards investing in a property at the most.
- The investment should have no bearing on your primary residential property if you are looking for returns straight-away.
- However, if you will sell off the starter property after a few years and use the profits to buy a bigger home, then you can invest for end-use initially.
- Capital value appreciation is the biggest gain for investors, enabling you to potentially sell off the property in the future and book neat profits for meeting long-term financial goals.
- You can also earn from steady rental income which will help you recover your investment over a prolonged duration, especially if the property is in a prime location. Thereafter, you can also earn from selling off the property.
- If you are comfortable paying the EMI at this juncture in your professional and personal life, then you can plough back the rental income proceeds into various other investments and accumulate a tidy sum for meeting future goals, while having the property in hand as well.
- You can invest in projects with assured returns including commercial real estate if you have the means. This will help you start earning returns from day one and you will ultimately break even. However, tread carefully in this aspect.
How the situation may pan out?
Scenario 1
Suppose Mr. A buys a property in an upcoming locality as a starter home for his family for Rs. 30 lakh. Within 10 years, the value of the property goes up by a handsome 50% (5% as the average yearly appreciation rate), taking its gross value to around Rs. 45 lakh. At the same time, factoring in depreciation (even though the apartment is well-maintained) and a buyer discount, Mr. A finds that he can sell the apartment at Rs. 42 lakh. He then books a profit of Rs. 12 lakh over his initial investment. He can now use this money to make the down payment for buying an even bigger home priced at Rs. 60 lakh for his family.
Scenario 2
Mr. A buys a property in an upcoming locality for Rs. 30 lakh just as a pure investment. He gets the same average capital appreciation and books a profit of Rs. 12 lakh, selling off the property at Rs. 42 lakh. At the same time, he had earned Rs. 15,000 per month in rental income after the first year of purchase. This has earned him a total sum of Rs. 1,80,000 per year, i.e. Rs. 16,20,000 in 9 years. Factor in rental increases every year and the overall earnings go up to a whopping Rs. 22 lakh. After deducting taxes, maintenance and operational expenditure, the net profit comes to Rs. 14 lakh (just an assumption). In this case, his total profit from the property play is Rs. 26 lakh. He can now use this money to invest in his child’s foreign education since this is not his primarily-occupied property.
Scenario 3
Mr. B buys a plot of land for Rs. 5 lakh near his home. Within just a year of the new metro project being announced, the value of the land shoots up to Rs. 8 lakh. Not wanting to waste time, he sells it off immediately, booking a profit of Rs. 3 lakh in the process. With this amount, he proceeds to spend on a long-dreamt foreign holiday for himself and his wife.
Scenario 4
Mr. C buys a property in an established locality for Rs. 50 lakh. After paying Rs. 10 lakh as the down payment, he takes a loan of Rs. 40 lakh, paying an EMI of approximately Rs. 32,000 every month. No wanting to waste time in earning rental income from his second home, he starts renting it out immediately for Rs. 35,000 every month. His net profit after deducting the EMI is Rs. 3,000, which goes in monthly taxes, maintenance charges, etc (just an assumption). Now, he finally breaks even with the EMI fully repaid at the time of his retirement, which is 20 years. In two decades, his rental amount has gone up to Rs. 50,000 (approx) and after deducting Rs. 10,000 per month for other costs, he earns Rs. 40,000 every month, which guarantees him financial stability.
Or else, he has the option to sell the property at Rs. 1.50 crore which is the current value in 20 years. Leave aside Rs. 30-35 lakh in depreciation and other discounts and you still have Rs. 1.20 crore as the asking price. He ultimately makes a profit of Rs. 1.10 crore in a period of 20 years (that is approximately more than Rs. 5 lakh per year!) since he did not pay a single rupee of the EMI from his own pocket.
Things to Watch Out For
Now that you know the possible scenarios, you should also keep in mind a few things to look out for:
- It may be difficult to find a buyer.
- Market values may sometimes erode due to various factors including lack of demand.
- Finding tenants may pose a problem. B
- There could be issues and costs with maintenance, taxation, repairs, etc.
- Choosing the right property for investments is a tough job.
Conclusion
Real estate, in spite of several difficulties, is always a good investment option for meeting future goals. However, do your homework and exercise caution before investing.
