Opportunistic v/s Researched Investments
Real estate investments, when made well, can be the safest and most rewarding investment an individual can make in his lifetime. To understand what makes a real estate investment great it is important to have industry knowledge, understand real estate trends and have the financial capabilities of making an investment when the right product at the right time comes along. Although most people look to purchase real estate with the purpose of actually living in it, almost everybody believes and treats it as an asset for the future generation. Your attitude and approach to your real estate investment can go a long way in determining the value you get from it. Those investing in real estate usually fall under one of the following three categories:
Short to Medium Term Investors
Individuals in this category purchase under construction properties with the goal of selling them at the time of possession to benefit from the rise in its market value. The purchase is usually made around the launch period of the project when builders offer heavy early bird discounts and attractive payment schemes. Projects that offer subvention schemes allow investors to pay a small booking amount and lock in on low interest rates. The tenure of such investments usually ranges between two to five years.
Medium to Long Term Investors
Investors in the medium to long term category usually make their investment decision after a lot of research and deliberation. This may be done because they wish to occupy it themselves or put it out on rent. Either way, investments made this category tend to be more structured, well thought out and take into consideration various factors like the surrounding locality, market price trends, rentability, present and future infrastructure projects, etc. Such investors enjoy hybrid profits by way of rental yields and long-term capital appreciation. They usually wait for a period of ten to fifteen years before liquidating their asset.
Opportunistic investors are those that look for properties that are being auctioned by banks, distress sales, fire sales, etc. They purchase such properties and once conditions stabilize put them back on sale at market value. Properties dealt with in this category are usually resale, however sometimes one can find distress sales in new or under construction projects as well. Investors in this category tend to be very knowledge about the market, understand its cyclic trends and have sound debt servicing capabilities. They profit from the difference in the discounted price they pay to procure the flat and value they receive on selling it.
Assessing Risk – where do you fit in?
Although on the surface it may seem most lucrative to be an opportunistic investor, it is also the riskiest of the three ways. Opportunistic investments are far and few in the market and usually come with some amount of liabilities. If one does not or is not capable of doing thorough research and fact checking of the property beforehand you risk sinking your money into a bad investment. Opportunistic investments are best suited to individuals who have in depth knowledge and experience in the real estate market and possess the required liquidity to seize the opportunity when it arises. Such investors need to always keep themselves abreast of the market situation and be prepared to put down the required money to close a deal on short notice.
The second riskiest category of investors are those that bet on short term gains. In such an investment the market trend must be favorable for the investor to witness an appreciation in his or her property value in a short span of time. Further, the investor must have adequate knowledge of the builder’s activities to be able to ascertain whether the property will be completed on time and be of the quality promised. Such investors take on high execution risk and bet on the market remaining steady. Although the introduction and recent popularity of subvention schemes have made this type of investment very attractive, it still poses a high risk as market prices continue to stagnate and many reputable builders are struggling to deliver on time.
The safest, and in my opinion, lowest risk investment opportunities are those that fall into the medium to long term category. With such investments one does not take on the execution risk like those in the first category and has sufficient time to do due diligence unlike in the case of opportunistic investments. With medium to long term investments you can see a sustained growth in your capital appreciation over a period of time as well as enjoy a healthy rental yield. In today’s market, the rental yield in India is averaged around 2-4% which can further increase in the case of fully furnished flats that offer tenants value added services alongside. The capital appreciation for residential properties in India is around 5-6%. Therefore, with the right investment you can stand to gain anywhere between 7-10% with minimum risk. Real estate investments made in such a manner can add to your portfolio of investments and give you healthy returns today while generating wealth for tomorrow.
“Views expressed are the personal views of the author. Any action taken based on the views will be the responsibility of the user alone.”
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