I feel that
people these days are more and more interested in investing in Real estate
especially because people are confused over other investment options such as
stocks and bonds and mutual funds because they don’t know where their money is
put or things go a little bit over their head because it seems all too
confusing. More so, when the returns are good and demand is high. After all, all of us need a home. So let's discuss some of the prevailing Real Estate investment options here.
Some of the
Investment options are:
- Buy and Hold
- Buy and Flip
- Lease to Own
- Construction / Development
- Buying Land and Rezoning it
- Unique Property
These are the
active strategies where people actually deal in physical possession of land and
houses.
The Passive
strategies include:
- REIT’s
- Real Estate Investor
- Private Lender
Out of these, let's discuss on Buy and Hold and Buy and Flip strategies.
Buy and Hold
This involves
buying a property to basically hold onto it. You rent it out to a tenant and
collect monthly rent cheque from him. This leads to a positive cash-flow for
you which also help you pay for your monthly installments on the mortgage. You
can finally either lease the property in the long run or you can sell it.
Drawbacks
- There is a risk of negative cash-flow risk which might arise when the rent that you collect is lower than your EMI that you pay towards your mortgage. This is a general scenario observed in all major cities of India. For example, in Mumbai a 1 BHK flat would cost somewhere around Rs. 1 crore which would entail an EMI of approx. Rs. 1 lac. Whereas the rent that you get would be somewhere around Rs. 20,000 on the same in case you have a tenant. This leads to a negative cash-flow situation.
- Another risk might be decrease in Property value in which case you would be losing that equity you put away every month.
- More often than not you are also afraid that the renters might not be taking good care of your property leading to a faster depreciation of your property value. I am surprised that in India no facility management service exists that would take care of your rented property. This seems to be a good business opportunity.
- In addition you also have to shed extra money for property maintenance which is another form of cash-outflow for you as a owner. Since this is your property, it is your responsibility to fix any plumbing or electrical problems.
Buy and Flip
This is an
investment strategy that involves buying a home below or at market value,
renovating it and reselling the same at soon as possible. You need a strong
market understanding so that you know the prevailing market price in the
locality, understanding what renovation would bring in greater value to the
property and knowing at what price you will be able to sell it.
Benefits:
Of course you
use this strategy for making quick capital gains. You want to get out quickly
as your money is locked in with the property. The only exit strategy that you
have is to sell the property and sell it soon.
Downfalls
- Cost of entry is very high as you pay hell lot of money to buy the property and then renovate it.
- It involves high risk of investment as a lot of your money is locked into it
- You are also dependent contractors who would help you renovate the property unless you have these facilities in-house.
- You always need to be on your toes as this strategy needs a quick turn-around time
These are just two of the many strategies used by people in the Real Estate Investment world. And I am still to find out which is the best one for Indian subcontinent. I will discuss other investment options in blogs to come.
