Real Estate Investing is an interesting topic which anyone likes to talk about and especially in India it is a mode where a lot of people invest their money hoping the property prices will increase over a period of time.
Types of Real Estate
Real Estate Investing could be broadly classified into two: Residential and Commercial Real Estate. At least this is what most of us are familiar with. A vast majority of us are familiar with Residential Real Estate. A few of us also venture out to Commercial Real Estate.
1970s ’80s and ’90s
Folks who have invested in major cities in India in the 1970s and 1980s or even the 1990s have made a great return on investment for their real estate. Though the prices were not as high as it is today, a lot of people who bought during this period had the means to buy (which was not easy) – so they worked hard and had some earnings. In spite of getting a loan from the bank, paying mortgage, interest, and more, the return on investment has been great. For a vast majority of people, it was not really an investment, it was a place to live. They enjoyed living in the house, and the house also appreciated in value. They got lucky.
2005 to 2010- Mad Real Estate Rush
The prices for real estate in the major cities in India started to increase multi-fold in the mid-2000s. There was a mad real estate rush between 2005 and 2010. The prices doubled, quadrupled during this period.
2010 and Beyond
The Mad real Estate rush continued till about 2014 after which the prices have more or less stayed the same. Since then, it has always been a good time to buy with one event or the other happening around us (Demonetization, Pandemic, and more). However, the prices do not reduce as the owners unless they are in distress do not want to settle for anything less.
Return on Investment (ROI)
If you are looking at residential real estate as purely an investment and if you do an ROI calculation it is common sense that the math does not work. The rental income one would get for a Rs. 1 Crore property may be Rs. 10,000 to Rs. 15,000 (just approximating). It is also hard to find under 1 Crore property in prime locations of the cities. If you get Rs. 10,000 on a Rs. 1 Crore property, your return is 1.2%. If you are looking at the place as your primary residence (place to live) – all this does not matter. Commercial real estate has better returns. However it comes with its own set of challenges and you need to be smart about the location, type of commercial unit and more.
Tenant Won’t Vacate
Tenant not vacating is a major problem in India where you would lease out the property to a tenant, and he/she would not vacate the property. This is a very common problem that everyone talks about. However, not much has been done in this regard to prevent this from happening. A friend of mine bought an apartment as an investment, paid mortgage & interest, and leased it out to a tenant. The rental yields do not cover the mortgage and interest. The tenant now would not vacate the property, and my friend has a mortgage to pay every month.
Someone Occupying Your Land
You will have to have a constant watch on your property all the time. It is not like you buy the property and forget it. Unless you live there or close by, there is a high likelihood that someone may start occupying the land you bought or do something with it. There have also been instances where someone else is building on your land if you are away, and it is a big legal battle. A friend of mine bought a property (his parents purchased it) in the 80s in Chennai. It was in the suburbs of the city then and has now become prime. While the property is worth several crores of rupees today, it is worth nothing to him as he is in a legal battle trying to recover the same, which is being occupied by folks that do not own the property. He ends up spending money.
Cash still plays a major role in property purchases. While for a brief period of time, it did look like the cash component will be eradicated in property purchases and all purchases will be through cheque or bank transfers, it is not the case. A vast majority of property transactions still happen through cash.
Guideline VS Market Value
Since cash transactions still play a major role in property purchases in India, there is a stark difference between the Guideline and Market Value in India. Guideline value is the price set by the Government, and the market value is the price the market is willing to pay. You pay taxes only on the guideline value or how much you are registering the property for. This further incentives people to pay by cash and avoid taxes. Not just that it creates a system for cash generation. There is a significant loss of revenue to the State exchequer. It is not that difficult to fix this problem. Unless the property is being given as a gift to someone, there are not many reasons to register the property below market value (or) an auction portal could be created where the highest bidder gets the property and the market value auto-adjusts.
There are a host of other issues which we could keep writing about. However, I do sincerely hope that we fix these challenges. Purchasing a house or an investment property in the United States is hassle-free. With so much western influence and so many people of Indian origin or Non-Resident Indians having lived or living in the West, there are a lot of things we can copy. Small steps taken to fix these problems is bound to have a compounding effect in the long run. This will pave the way for creating a better India.