Looking to invest in real estate? Even though the Indian real estate market is going through a difficult phase, real estate remains one of the best asset classes based on its long-term performance. It makes sense to buy properties right now as prices are low and the market is expected to recover in a couple of years.
Why Invest in Properties?
As an investor, you cannot ignore real estate as an avenue for investment. For a balanced investment portfolio, you need to diversify your investment across different asset classes such as equities, debt (fixed deposits, bonds, etc), gold and real estate. In the long run, we have seen properties to give good returns on investment. Unlike equities, the risk of downside is limited as the underlying asset for all properties — land — is a scarce commodity.
Real estate can emerge as a good investment option for both capital appreciation as well as regular income if invested wisely. On an average, commercial properties such as shops and offices generate a rental income of around 10% of the property valuation per year. For residential properties, one can expect a rental return of 3-5% per year. On the capital appreciation or increase in the value of property, one can expect 10-15% annual growth for residential properties in the long term. Retail spaces and offices tend to witness a slower increase in property prices.
Invest in Residential or Commercial?
Once you have decided to invest your money in properties, you must pick between residential (apartments, houses & land) and commercial properties (shops & offices). The choice should depend on your risk appetite and investment goal.
Given the heavy influence of economic conditions on demand for retail stores and offices, the performance of commercial properties can fluctuate heavily. In contrast, demand for residential properties is more stable and the impact of economic fluctuations is generally subdued.
When investing in properties for generating a regular rental income, it makes more sense to scout for commercial properties as these generate a rental return of around 10% per year. In contrast, residential properties will fetch only 3-5% per year.
Rental profile should also be considered. It is easier to rent out your house than finding a tenant for your office/shop. However, residential properties are generally leased for 1-3 years, while commercial properties have longer lease tenures. It means you will have to scout for tenant for a house more often than an office space.
Never rush into a property investment. Try to analyse your investment requirements, pick the right investment locations and the types of property suitable for you. Explore the locality and the different property options available for investment. Invest in your desired property once you are confident about picking the right option. If you are unsure about the decision, don’t hesitate to get professional assistance for financial planning and property investment.