When it comes to thinking of ways to manage wealth, real estate is often a top contender in terms of investments. A relatively stable and strong asset class in many markets, real estate offers Indians the opportunity to invest in an asset that will stay with them for years to come and also provide them with a place to call home. A large investment, it’s extremely important to understand how residential and other types of real estate perform over a period and how to go about purchasing your first piece of real estate.
Capitalise on rent and start early
Most young Indians today are spending upwards of 30% on rent and utilities given how expensive real estate can be in Tier 1 cities. In this case, it makes more sense to invest in a residential apartment by taking out a home loan and utilising the same rental amount to pay for EMIs.
Not only does this save on the lost opportunity cost of paying rent for a rental apartment but is also a wise investment that provides security and long-term value-creating opportunities. With real estate, it’s important to adopt a long-term view and to be patient because, unlike other asset classes, real estate can take years to appreciate though the rewards are often very healthy. Real estate investments are less volatile and are ideal for individuals who have surplus income that can be funnelled into a real estate investment.
How to choose the right investment
When choosing to invest in real estate, which type should you spend your money on? Commercial or residential or then industrial? Each of these categories has its own risks and rewards and especially seeing what happened during the lockdown, it’s hard to predict any precise outcome.
Residential real estate investments are generally considered safe bets, especially when made in larger housing complexes, and do not suffer from the same cyclical demand risks that are associated with commercial properties. On the flip side, rental yields are lower and residential properties generally provide a lower value appreciation. Still, it is always recommended that first-time buyers secure themselves by buying a residential property first and then venture into investing in commercial, industrial or other residential home units.
Hedging against inflation and understanding its impact on real estate prices
Few asset classes are considered safeguards against inflation, as their prices largely move a step ahead of the general inflation rate. This pricing behaviour makes it important for individuals to invest during periods of low inflation or crisis and then hold real estate investments during the subsequent high-inflation period which is typical of most inflationary cycles. Not only do real estate investments protect your capital from losing real value, as compared to a fixed deposit for example, but they can even generate inflation-beating returns over a long-term horizon.
For those individuals who may be trying to time their entry into the real estate market, it is important to note the impact of rising inflation on real estate value, since the cost of new homes generally increases in line with the rise in raw material prices
Therefore, it is vital for first-time homebuyers to make their residential property purchase before these inflationary pressures are translated into a proportional price rise. In the case of commercial real estate investments, the impact of inflation on the overall cost of acquisition is minimal as owners can command higher rents from tenants and balance out the increase in the purchase price.
Whether investing in a first home or expanding one’s real estate portfolio, the above factors are worth researching before signing on the dotted line. With the Indian economy bouncing back to pre-COVID levels and other bellwether indicators like GST collections reaching record levels, the Indian real estate industry is slated to witness record expansion rates in the near future. Against such a backdrop, it is prudent to adopt a more holistic view of real estate investing and take the plunge while prices remain near pre-COVID levels.