Last Updated on 05/08/2021 by Deepak Singla
Real estate has proved to be one of the most profitable asset classes to acquire wealth. It is also one of the fast-growing sectors in India and forms a large part of its economy. Your land and your home are appreciable assets that are considered stable and less volatile than any of your other investments. It is a tangled asset that stands as long-term security or collateral. Real estate has been selected as an ideal real estate investment for diversifying investment portfolios to mitigate investment risks.
Real estate has become a best investment option due to numerous reasons such as excellent capital appreciation, tax benefits, stable passive income from rental investments, etc. adds to the overall wealth creation objectives of the investors. Builders have started giving discounts on the properties and the government has also reduced stamp duty charges.
RBI has reduced the Repo rate and home loans are now available at a record low-interest rate. People are also looking forward to investing in spacious residential spaces in tier-II cities as well. With all these factors combined with technological advancements, 2021 is definitely a great time for real estate investments. Let’s delve deeper and check whether real estate investments are worth the risk.
Benefits of Real Estate Investments
To answer the question of whether real estate is a good option to invest in despite the risk it involves, let’s quickly evaluate some pros of investing in real estate.
i. Real estate is an appreciable asset
It is not a hidden fact that real estate assets appreciate over time. A very well-chosen real estate project even appreciates at a rate that outpaces annual inflation rates. You as an investor, should carry out due diligence and evaluate each property before investing in it.
You should check if there is any legal or financial burden on the property. By acquiring property and then making certain innovative improvements, you can reap a large profit. By doing proper research you will also be able to find properties at a discounted price. Real estate assets have an intrinsic value and unlike stock market and other investments, real estate is much more stable and less volatile. The fact that real estate properties appreciate at a higher rate, with or without improvements, is what makes it an excellent choice for investment.
ii. Real estate and its unique tax benefits
The fact that real estate investments come with tax benefits is yet another reason why you should invest in real estate. The tax benefits granted on real estate investment enables investors to grow their wealth in the long run. Owning a property is somewhat analogous to being the owner of a small business and by making some deductions on your expenses you can achieve both wealth and financial freedom. Sections 24 and section 80C provide you with deductions on your property purchase when it is financed through a home loan. The Income Tax Act also provides certain depreciation reductions and this is considered to be the biggest deduction granted on rental real estate properties.
iii. Steady cash flow through real estate investments
While investing in rental properties, you can earn yourself a steady income regularly. Real estate investments made in fractional ownership, rental properties and REITs can earn you this steady cash flow. You can also invest in real estate mutual funds to earn a passive and stable income from real estate assets. If you are investing in real estate through a crowdfunding model, then you need not worry about maintaining your property as your crowdfunding manager will take care of it.
iv. Real estate lets you use the leverage
You can also use leverage to grow your real estate holding and accelerate your wealth-building process. The process of leverage can be explained as the process of using borrowed capital to purchase or invest in projects that are capable of earning you a potential return.
You can use leverage and invest in high-income-generating real estate property. You can invest in real estate through leverage by borrowing from sources such as banks, Credit unions, Private money lenders, hard money lenders, etc. By investing through leverage, you can increase your return on the property. You can also own properties that were otherwise out of your limits.
v. Real estate provides you a hedge against inflation
Inflation can be defined as an economic reality whereby the price increases over time due to the decreasing value of money. Normally inflation erodes most of the investments, however, that is not the case with real estate as it has a hedge against inflation.
When the inflation rates go higher the rent payable or in general, the price of the property increases. If you have invested in your property through leverage on fixed rates, then you may also enjoy the benefit of earning higher rental income and lower cost as your EMIs don’t change. As the cost of living goes higher with the inflation rate, you will enjoy a steady cash flow. 10 years down the lane, when you want to sell your property, your property will value way higher than the cost.
vi. A real estate is a great option for portfolio diversification
Experts have then and now stated real estate to be one of the best ways to diversify your portfolio. A real estate is a widespread form of investment as it includes options such a self-owned property, property for leasing and rental purposes, etc. While making real estate investment decisions, you can also decide if you want to make residential or commercial investment. By investing through crowdfunding options, you can also diversify your investment portfolio geographically. By diversifying your portfolio, you can mitigate investment risk to a great extent.
Risks of Real Estate Investments
Like the two sides of a coin, real estate investment also has risks involved in it. However, by efficient risk management, you can identify these risks at an earlier stage and mitigate it before it becomes too risky. Let us look at some of the risks in real estate investments.
i. Financial risk in real estate
Real estate investment is high capital investment. To start your investments in the real estate sector, you will require a large sum of money to furnish the down payment and the closing cost on the property. You also require money to furnish expenses such as stamp duty, registration fee, improvement cost, maintenance cost, etc. on your real estate investment. Tax, loan interest rates, insurance, etc. are also factors that make real estate investment expensive.
A number of people start their real estate investments by taking out huge loans and this in fact magnifies your investment risk. If you choose to borrow using floating interest rates, then with the increase in interest rates, your financial costs may also rise. This can cause difficulty in cash flow and thus cause investment risk. Financial risk is common in both commercial and residential real estate properties. but commercial bridge loans fill this gap and act as interim funding, It acts as a temporary financing to help sustain cash flow.
Real estate investors are also time-consuming as it involves tiresome paperwork and approvals. By investing in crowdfunding opportunities, you can now invest in your dream project with lower capital. While investing through crowdfunding options, due diligence, paperwork, and maintenance activities are carried out by the property manager and thus you need not worry.
ii. Liquidity risk in real estate
Most of the investments are highly liquid and can be bought and sold whenever they want. This is not the case with real estate investments. A real estate property cannot be sold quickly and easily without incurring a substantial loss in value. However, as the world is changing and adapting to the improved technology, real estate no longer remains illiquid. Blockchain technology breaks down real estate assets into the block and trades them. Thus anybody investing in real estate using blockchain technology can now eliminate the risk of illiquidity and trade their real estate assets with real ease.
iii. Legal risks in real estate
Real estate investments can be problematic if there is a legal dispute pending on the property. These legal issues include ownership claims, pending encumbrances, or outstanding tax payments. Any legal dispute on the property means more cost and loss. Thus you must verify all the documents and ensure that the seller has a clear and marketable title in the property.
The importance of due diligence in real estate transactions cannot be ignored. It is considered one of the most important parts of a real estate transaction as it helps you in determining the actual price of the property. It also helps in identifying any encumbrances attached, or even any legal disputes pending on the property. If you do not carry out due diligence before investing in your property, you may stand at an investment risk and even lose your right over the property.
India is becoming one of the most sought out locations for real estate investments. With the real estate market developing with infrastructural and industrial developments, it is all set to be one of the top three destinations for investments in the world. Investing now in real estate can be highly rewarding as in the near future the price of the property and even the rental incomes on the property is all set to increase. Real estate as a sector also offers diverse investment opportunities.
While carrying out real estate investments, it is necessary that you know the trends in the market and also the best area to invest in. As technology is growing, the real estate sector too is adapting to it. Real estate transactions have been made easier and affordable. Assetmonk is a smart investment platform offering real estate assets with IRR upto 21% in Bangalore, Chennai, and Hyderabad.