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.

------ Thanks for reading RealT Horizon J Happy Investing ------

Is this the Right Time for NRIs to Invest in India?

NRIs (Non-Resident Indians) comprises of an important chunk of population which contributes the most to Indian economy, without even being physical present here. India is blessed to have such a huge Indian population fueling its growth from abroad and the same is true for NRIs, who are blessed to have India as their motherland which provides them such fantastic investment opportunities. Let’s see how.

INR vs. $: Who all get benefitted with their movements?

 If you follow the Asian Financial and Economic markets, you would know what is going on in the volatile Indian markets. INR has been falling continuously against US $ before lately regaining some strength. At the time of writing this post, INR was placed at Rs. 61.20 against $ 1. But the situation had been worse a few days back when INR had touched Rs. 67 = $ 1 mark, creating an all-time low record; So much so that people had started comparing INR with US Cents; Rs. 1 = 1.5 cents.

So how is the above information related to our topic on NRIs? Well, let us tell you how. We will be extremely straight forward in putting forth our views on this topic. Consider the following situation:

• Mr. A is an NRI, residing in Michigan, USA.
• He aspires to invest in India and his obvious choice would be to invest in Real Estate; because he is sane ;-).
• He wants to invest in a range of INR 5 million to INR 7 million.
• Let’s compare the scenario when INR was 67 and when it is 61 (rounded off for simplicity) against $.

Cost of Property	Cost in $ (Case: INR/$ :: 67)	Cost in $ (Case: INR/$ :: 61)	Absolute Difference	% Difference
INR 5 million	$ 74,627.00	$ 81,967.00	$ 7340.00	9.8%
INR 7 million	$ 104,478.00	$ 114,754.00	$ 10276.00	9.8%

Just look at the above figures. Mr. A would have saved a fortune, at a discount of ~10% if he would have invested in the same property when $ was making rounds near INR 67 as compared to the current situation!

Closing Thoughts

Dear NRIs,

India is a great destination for investment – this statement needs no evidence. So just be a little more rational and act as soon as possible to make investments. This is because you never know where our new Governor & upcoming new Government will take the INR ;-). It is always better to be late than never J.

Sincerely,

RealT Horizon

PS: We would have made the investments if we would have been in your place, you may not. It’s subjective as well as cognitive.

------ Thanks for reading RealT Horizon J ------

Rent by Price Ratio: Real Estate Valuation by Rent

Continuing our RealT valuation series, we now bring to you – Rent by Price ratio. In our post – “Valuation by Rental Prospects - Real Estate Valuations” we discussed how an individual should take into consideration the rental prospects while valuing a property. Today let’s discuss whether or not a prospective rent enough?

Facing dilemma: Which property to select?

Many a times, we get confused making choices between different assets. It becomes tough to select one from a choice of 2-3 properties. In such confusions, the decision is generally made based on only apparent features (aesthetics, size, location, ease of transaction etc.). To provide a rationale to this dilemma, we bring to you the concept of Rent by Price ratio (RP ratio).

Rent by Price Ratio (RP)

As is self-explanatory from its name, RP ratio means:

This gives you a fraction which can be used very effectively for evaluating more than one property together. To state in simple words, this ratio gives you the percentage of initial price that you can recover per annum by rental income.

How to make the choice?

Let’s take a scenario that you have a choice to make from among the following options:

Property	Prospective Rent	Price	RP Ratio
Prop1	INR 25,000 pm	INR 7.5 million	4.00%
Prop2	INR 20,000 pm	INR 5.5 million	4.36%

                                                         Source: Real Scenario of 2 properties in Hyderabad, India

As both the properties provide awesome investment opportunities and are located opposite to each other, it becomes increasingly difficult to make a choice among the 2.

But looking at the last column (RP ratio) in the above table, it becomes very clear that Prop2 provides a return of 4.36% against 4.00% of Prop1.

Hence it makes more sense to go for Prop2, than for Prop1.

Dilemma Solved, Decision Simplified B-)

Closing Thoughts: We formulated the above concept and analysis while facing a dilemma on making the choice on the above 2 properties only. This RP ratio provided us a yardstick to go for Prop2 & we followed it; you may not. It’s just indicative, not a sure shot approach to making decision.

------ Thanks for reading RealT Horizon J ------

Real Estate Valuation: How to increase value of your Property?

This is in continuation to our real estate valuation discussions in our last posts:

• Valuation by Rental Prospects - Real Estate Valuations
• Can Value in Real Estate be created, artificially?
• Valuation of Real Estate: How can you value your RealT?

Everyone, including you & us, is looking to make money in real estate & increase valuation of assets. Today let’s discuss how you can increase your assets’ worth manifolds, just by a small manipulation.

Recipe to Increase Asset Value

This might look like an unorthodox and risky approach to some of our readers, but it works.

‘You find an uninhabited area in the city, almost barren land, where no one would want to reside. Increase the worth of the area and exit gracefully.’

To explain in detail, let’s consider the following real case study:

Following is the satellite snapshot of an uninhabited area in Udaipur, Rajasthan (India).

Satellite snapshot of Chitrakoot Nagar, Udaipur

Surely no one would prefer to build a house in this part of the city. But now let RealT Horizon guide you on how to create value in this region.

If you look carefully, you will see some upcoming development in the nearby region (as shown below).

Potential & developing areas marked in red

As the area is uninhabited, most likely you will find the land in the potential marked area in the above snapshot at very nominal price. Now as an investor you have following choices:

If you go for this option, you will help others and make losses yourself. You will purchase the plot and struggle to receive the returns which this property is capable of providing.

You will create a handsome chunk of fortune for yourself by this decision. Suppose you have bought 3 plots here. Construct a building on one plot and sell it at par with your costs. Once one building has been constructed in the area, the prices shoot up for the remaining plots. Now you can make a good fortune on your remaining 2 plots.

You miss out on a golden opportunity in this area.

The reason why this area will develop in due course of time is because there is a developing area in the vicinity.

So in this manner, you have created money out of a barren land, just by streamlining your investment decisions.

Disclaimer: The above analysis is based on our understanding and experience. What happens in future will totally depend on your due-diligence about the area in the picture!

------ Thanks for reading RealT Horizon J ------

Valuation of Real Estate: How can you value your Real Estate Asset?

While laying down on the couch on this lazy Sunday evening, a thought stuck to us: Is there any defined way to value our Realties? Of course there are few in the form of Govt. DLC rates & CMP (current market prices) that gives some indication of the possible value of our real estate properties, but still we miss out many important aspects if we go by these rates. Let’s go back to the basics and first try to slice the term ‘value in real estate’ to finer levels.

What is ‘Value in Real Estate’?

To state in layman terms, value in real estate is created if any of the following dimensions gains weight.

Let’s have a look at these aspects in finer details.

Utility 

Any asset/object is worthless if it doesn’t create utility for the owner. If real estate property, howsoever costly it may be, is unable to create its worth and use for the owner, then its utility decreases. We hope the following figure can help in explaining this further:

In above case, the utility of cookies decreased with the increase in number of cookies. Same is the case with real estate utility. If the property can’t be utilized to its full value, its utility decreases.

Supply 

Just compare the price of a commodity (like salt) which is abundantly available to a commodity (like petroleum) which is scarce! Same holds true for Real Estate in the way that properties in an area where there are several options is cheap as compared to the one where no properties are available.

Demand 

Similar to the above concept of Supply. If a property is in high demand, it is valued more & vice-versa.

Transaction 

Suppose you have bought the bicycle - Litespeed Blade (£25,317)

Just imagine how difficult will it be for you to resell it or make its transactions! Same goes with Real Estate; you invest in some property like this and get stuck to it for your lifetime: literally no value.

Psyche 

The social pride and psychological pleasure is something that no one can monetize. It will be different for each and every individual. Suppose for example, someone will definitely derive immeasurable value by just having the pride of owning the above bicycle.

Let’s demonstrate the entire above concepts using a common example. Suppose you have a family of 2-3 members & have bought the home shown below: (Just an imagination; don’t get carried away! ;-))

Just check its value on different aspects:

Aspect	Reason	Value
Utility	Such a big house for just 3 members!! Under-utilization of resources.	▼
Supply	Definitely, houses of this sort are not available down the street. It is tough to find such houses. They are scarce.	▲
Demand	Demand for such properties depends on buyers, which is generally very less. You will rarely find a buyer looking for such properties.	▼
Transaction	Tough to transact, definitely!	▼
Psyche	Un-measurable; if you can take care of the income tax folks!! ;-)	▲▲▲▲

Closing Thoughts: These are some of the basics that we thought are vital for any Real Estate Valuation. There are few more technical methods which we will try and cover in our forthcoming posts.

------ Thanks for reading RealT Horizon J ------