High Priced or Low Priced: Which one should I go for?

Many often, we come across this dilemma when we wish to make an investment, not only in Real Estate, but even while investing in Equities and Bonds. Let us try to decipher this confusion.

Define a Time Horizon

The first thing you should do is to decide is the time window you are looking at while making the investment. The decision of high/low valued assets will follow your time horizon. We typically define the windows as follows:

1-5 years: Short-term Investment

5+ years: Long-term Investment

Everything has a Limited Upside

This is one fact that you should imbibe in your thoughts if you want to be a successful investor in any asset class, real estate included. You cannot count indefinitely on the increasing prices and trust that they will keep on increasing forever. There will be a stage when the price movement will virtually halt and the growth rate will shrink manifolds.

The Decision!

Once you have decided your time frame and imbibed our above advice in your wits, it’s time to take the decision. Check the analysis done below:

Here we are taking an assumption that the upside for High Priced property is 10 years & for low priced, it is 7 years. This is justified because generally the high priced property is more sustainable as compared to the low priced property.

	Initial Investment	Initial / Long Term Growth Rate (%)	Short Term (1-5 years)	Short Term Returns	Long Term (5+ years)	Long Term Returns	CAGR
Low Priced	$ 100,000	13 / 8	$ 163,047	63.05%	$ 190,178	90.18%	7.40%
High Priced	$ 1,000,000	8 / 8	$ 1,360,489	36.05%	$ 1,999,005	99.90%	8.00%

As is apparent from the above analysis, the Low Priced Property yields more returns in short term and comparatively lesser returns in the long term as compared to the High Priced Property.

With this illustration, this discussion comes to a conclusion:

Low Priced  :	Short Term
High Priced :	Long Term

Disclaimer: The above analysis holds good for most of the cases, but not all. Hence it is advisable to take an informed decision before making any investment.

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Financing the Real Estate by Equity

In our previous post Financing - Funding a RealT, we showed how debt can be used as a vehicle to fund your RealT project. In this post, we will try and elucidate how one can finance projects using equity.

Out of the above 3 ways, top 2 are self-explanatory. But let’s just look at the Real Estate Investors part and REIT in detail.

As can be seen from the above classification that in real estate, there are various investment fund options. Let us summarize each of these with one line explanations: 

Type of Investor
Venture Capital	They invest very cautiously in realty projects by valuing its worth using their models of valuation.
FDIs	Real Estate sector has attracted a lot of FDI in India, but recently the trend has been falling. See figure 1.
Hedge Fund	Though not very popular, but Hedge Funds are increasingly moving into funding the real estate projects.
Insurance Companies	They invest in large projects having high returns for longer horizons which commercial banks generally don’t take up.
Pension Fund	Another new source of financing in real estate. They generally fund through mortgage bankers & brokers.

An analysis of Real Estate FDIs in India

Figure 1: Rising FDI share towards the end

REIT (Real Estate Investment Trusts)

This is an extremely important instrument in the Real Estate Financing as it pools in the investments from various investors and then use this fund to finance the realty projects. REITs is a vast topic in itself and we will share our views on them in our later posts. But just to explain the basic phenomenon of REIT, refer figure 2.

Figure 2: Basic mechanism of REIT formation

Note: We have just touched upon the aspects of Equity financing in real estate, however the details of many of these instruments will be covered in our subsequent posts.

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