New to real estate?

Finding Your Way In The Wonderland Of Real Estate

Newcomers to the Wonderland of real estate tend to be cautious as well as nervous when it comes to investing in property. This section has been devised to guide you on investing in real estate and to help you find your way in the largely unorganized property market. We help you find out how to invest, where to invest and the factors that need to be considered while investing in real estate.

While this site is specific to the Bangalore real estate market with detailed information about various locations, rates, rules and regulations specific to the city, the principles provided here on investing in real estate can be applied anywhere.

Identify your investment objective

To start with, you need to figure out your investment objective(s), so that you can identify the type of property to purchase. Property investments yield gains through the following routes:

1. Capital appreciation - Over a period of time, the value of property rises. This is largely due to the laws of demand and supply and the dynamics of other investment avenues like stocks, bonds, gold, etc. Its attractiveness lies in the fact that real estate often gives the best risk-return ratio: which essentially means that returns are higher, although risk is considerably lower (compared to other market opportunities). By selling property when real estate prices are high you increase your positive cash flow. The profit you make, however, is subject to a capital gains tax.
2. Positive income returns - You can also think of this as continuous income. On purchasing property you can realise regular or continuous income from it in the form of rent or lease. This income continues till the property is sold.

Investment Fallouts:

There are three obvious results of investing in property:

1. You make money;
2. You lose money;
3. You break even.

Clarity of purpose:

Before you put your money in a piece of land or a flat, you need to ask yourself the purpose of your investment. As I have said earlier, there are two ways of making gains in real estate: It is either through Capital appreciation or Positive income returns. The best way to make money depends on the investment objective. I have classified different ways to invest in another section based on real estate investment objectives.

The common objective amongst those in employment is an alternate source of income, a kind of insurance against job insecurity. To de-risk themselves on the job front, people in this category aim for rental/lease income from their property. This category of people would bank on continuous income returns rather than aim for capital appreciation.

Those who are self-employed are observed to, by and large, invest for capital appreciation.

Equipping yourself for the property market:

The key to succeeding in the property market is investing in the right place, right property and at the right time. Knowledge & understanding of real estate and the ability to invest time is key to achieving this. If you are equipped with these, nothing can come between you and success in your investment objectives.

Help with identifying the right place, right property and the right time is what propertydiscovery.com provides people who want to invest in the Silicon Capital of India.

I am categorizing investments based on the outlook of different individuals who wish to invest in real estate for different reasons. You could fall in any of these categories.

Property investment can be classified as under:

1. Self-occupancy
2. Investment for benefits
3. Long term investment
4. Investment for immediate returns
5. Commercial investment
6. Risk investment
7. Short-term investment
8. Buy-and-hold investment

1. Self-occupancy: "I have invested in my own house"

This is investment for people seeking to buy an independent house/apartment/land for their own residential purposes. People are usually very cautious on this front in terms of price/location/dealings. There is often a certain amount of apprehension about all the aspects of the real estate, i.e., from finding a proper place to the point the property is registered. People opt for the following options:

Avenues for return on investment:

Positive income return: You could rent part of your house, which could provide positive or a continuous income.

Capital appreciation: The property value rises over a period of time, which could increase your positive cash flow should you choose to sell it.

Risks involved:

• Getting misled on pricing and location;
• Agents/middlemen can mislead buyers who are new to the property market;
• Indecision, vulnerability stemming from ignorance about real estate; 
• Long gestation periods for decision-making, often up to a couple of years, by which time
  real estate prices could rise further. 

2. Investment for benefits: "I invest for the benefits"

Many buyers in the property market invest to avail of various benefits, including tax sops. Buyers in this category tend to look for a built-up house or apartment.

Note: Investment on land alone is not exempt from tax.

Return on Investment:

1. Rent from the house: This could be positive income return or continuous income;
2. Property value increases over a period of time, which could increase your positive cash
   flow if you sell the property;
3. Income tax benefits on the interest you pay, which are capital savings;
4. Company benefits like interest subsidy/interest free loan are capital savings.

Risks involved:

1. Exemption from tax is governed by government's economic policies that can change from year to year;
2. Benefits from the company may vary depending upon corporate policies;
3. Identifying the right property that would yield a certain RoI;
4. Managing tenants and filing accurate tax returns.

3. Long term investment: "I invest for the long term"

This is for people who are in it for the long run. Buyers in this category generally select land on the outskirts of the city with an eye on future growth potential. The outlook is often in the range of 10-15 years. The objective here, clearly, is capital appreciation.

Return on Investment:
Nil during the holding period.

Risks involved:

1. No immediate return on investment;
2. Real estate prices tapering off;
3. Acquisition by Bangalore Development Authority.

Advantages:

1. Land outside the city is usually available cheap;
2. If you are investing for purposes other than profiting from it, you could use it to build a farm house or resort or even agriculture for which it could prove an excellent investment;
3. Land purchased in locations well out of Bangalore could pay off in the long run if there is any development around like private developers acquiring and constructing apartments or BDA layouts coming up near by, Ring Road development, etc. 

Note: Investment in land is not exempt from tax.

4. Investment for immediate returns: "I invest to earn"

People in this category invest to get immediate returns in terms of rent/goodwill. "I earn as I invest" is their motto. Investment could be in any property, which brings revenue.

Return on Investment:

1. Rent from your house. This could be a Positive income return or Continuous income.
2. Deposit/Lease/Goodwill earnings.

Risks involved:

1. The task of finding the right property and managing the tenants.

5. Commercial investment: "I invest for commercial purposes"

In this category, investments are made in commercial land / commercial buildings /farm houses/cottages, etc, for future commercial benefit. Land which has the potential for future commercial development (multiplexes, shopping complex, malls, hypermarkets, factory outlets, etc) or which has a future, as residential layouts, would come under such investment. As real estate prices rise in Bangalore, people are buying empty farmlands at low prices to hold as long-term investments. Non-resident Indians (NRIs) /builders are among those who buy with this perspective.

Return on Investment:

1.   No immediate returns; only capital appreciation.

Risks involved:

1. Development may not take place as expected;
2. Real estate prices could crash.

6. Risk investment: " I invest for future returns"

People in this category are mainly professionals in the property market and have complete knowledge of the background, growth rates and potential of the location. Such people often invest large sums running into crores of rupees to buy acres of land at the outskirts of the city. Big investors like private layout developers form the major chunk in this category.

Return on Investment:

1.  No immediate returns; only capital appreciation

Risks involved:

1. Development may not take place as expected;
2. Real estate prices could crash.

7. Resale investment: "I invest for immediate returns"

Once again, people in this category are professionals who are well versed with the intricacies of real estate dealings. They invest in real estate only to sell it within a short span of time, often within a year or even less.

There are two categories in Resale investment:

Resell the property as it is: These investors buy and hold it for a very short time, some times selling it even before the title is transferred in their name.

Resell the property after alterations: These investors buy and renovate a property to some extent and sell it before or after registering the property in their name. The idea here is to add value by making some improvements to the property and make a larger profit.

Risks involved:

1.  Real estate prices could crash;
2.  This will work out only when real estate prices are rising rapidly.

Return of Investment:

1.  Immediate returns

Assume that you have purchased a property at this point for Rs 11.5 lakh inclusive of registration costs and brokerage.

You further invest Rs 2 lakh in renovation, while the agent's commission is 2%.

Now you want to sell the property immediately, maybe within three months.

In a fast-moving real estate market scenario:

Assuming you sell the property for Rs 17.5 lakh within 6 months of purchase. What would be your profit?

Capital gain = (Price Sold - Agent's Commission) - (Price paid)

= (Rs 17,50,000 - Rs 35,000) -( Rs 11,50,000)
= Rs 5,65,000

We also need to factor in the loss of regular income and benefits that the buyer would incur for 6 months before selling out to make capital gains.

This comprises:

(Rental income + tax benefit) - (interest)

= (Rs 8000*6 + Rs 24000) - Rs 34500
=  Rs 37500

Profit = Rs 565000- Rs 37500
= Rs 527500

8. Buy and hold investment: "I invest for future returns"

People in this category buy and hold the property for the near to medium term, maybe 1-5 years. The buyer often rents out the property and gets income returns till he sells it. Here the buyer would make substantial gains if he sells the property at an appropriate time, when real estate prices are high.

Return of Investment: 

1.  Positive income or continuous income from rent;
2.  Capital appreciation on sale of property.

Take the case of a buyer purchasing a property in 2002:

Price paid Rs 20 lakh inclusive of registration costs and brokerage.
Amount borrowed is 85% (Rs 17 lakh) on a 20-year floating interest loan at 11% per annum; 
The rent from the property is 8000 per month; 
The property has been rented out all through;
Tax benefit is Rs 4,200 per month;
Agent's commission is 2%.

The investor wishes to sell the property after 3 years.

In that three-year period the buyer would:

• Receive Rs 2,88,000 in rent
• Pay Rs 96,000 in property costs towards principal amount
• Pay Rs 6,00,000 in interest costs. 

Today the property would be worth Rs 30,00,000. Assuming that it is sold today, what would be the profit?

Capital gain = (Price Sold - Agent's Commission) - (Price paid)

= (Rs 30,00,000 * 98%) - (Rs 20,00,000)
= (Rs 29,40,000) - (Rs 20,00,000)
= Rs 9,40,000

We also need to subtract the ongoing income loss that the buyer made each year, which comprises 

(Rental income + tax benefit) - (interest)

= (Rs 2,88,000 + Rs 1,51,200) - (Rs 6,00,000)
= Rs 1,60,800

Profit = Rs 9,40,000- Rs 16,08,00
= Rs 7,79,200

The net profit or capital gain is 779200.

How and where to invest

How to avoid above risks mentioned in each case above: The key objective of www.propertydiscovery.com is to inform and educate the lay person on all aspects of property investment so that he/she can confidently shop in the real estate market for either capital appreciation or positive income returns.

How does propertydiscovery.com help? Learn about real estate in and around Bangalore by taking a virtual tour of the city on our website and analyzing prices in different parts of Bangalore for the past decade. www.propertydiscovery.com will help you understand the real-estate scenario in various parts of Bangalore with the help of graphics and video clips.