A proper way of Investing!

Risks in Real Estate Investments

In our earlier post – Real Estate for Small Investors, is it? [click here], we suggested various ways in which people can invest in this field.

But very often it is seen that a common man is reluctant to invest in real estate properties, owing to the perceived and prevalent risks in this sector. This reluctance is even more severe when an individual is asked to invest in the areas, located far from his/her current place of residence. Let us first have a look at the types of real estate investments that a common man generally makes.

• Buy a piece of land
• Buy a constructed property
• Lease a building
• Convert a far flung piece of land
• Book a property in an ongoing project by a builder

No doubt that these are all great means of investing and many a times provides handsome returns on the employed capital. In fact many individuals have made huge fortunes by simply following the above mentioned approaches of investing. But still, this sector seldom sees the confidence and faith among the investors as it is entitled to get. Reason? Well, here are few of them:

Major Risks

These are some of the most common risks that people believe can affect their RealT investments. Let us come to each risk one by one and the ways in which they can be mitigated to some extent:

Risk	Issues	Mitigation
Economic Risk	This is the first & foremost risk faced by any investment in any region. The fluctuating prices of land in some regions due to the mismatch between demand and supply tend to give rise to the fear of this risk.	This risk can be mitigated by setting a clear time horizon of investment. Moreover pre-investment background work of historical price movement in the region can give the investor some confidence.
Illegal Possession	This risk is most common in any investment made outside your hometown & mostly in metropolitan cities like Mumbai, Delhi etc. Rental investments face this risk as there have been cases wherein tenants have illegally occupied the properties.  Even the non-rented properties face this risk due to the presence of land-mafia (a person illegally claiming others’ properties).	Land acquisition laws have become stricter these days. Before renting a property, it is recommended to have a background check of the tenant & have a robust legal agreement of limited tenure. Landlords should increasingly ask for payments through PDC (Post Dated Cheques) to be on a safer end. Regular visits to the non-rented property and putting up your name board on the property can reduce this risk to a large extent.
Project Operating Risk	People investing in the ongoing projects by builders face this risk. This risk may arise when a builder / contractor falls short on finance or other resources required for completing the project. This is also linked with the financial risk explained above.	Never pay complete or major part of payment in advance to the builder. This will finish his liability to complete the project in planned manner. Check the track record and credibility of the company before investing in their projects. Have proper legal agreements ready at each checkpoint of payment.
Construction Risk	Closely related to the above genre of risk, this arises when there are inefficiencies in the construction process. Refer to our previous post – Construction of a RealT project  [click here] for more detailed insights on this point.
Interest Rate Risk	Often due to the not-so-stable political and economic conditions in India, the RBI chooses to change the interest rates of the housing loans. This may cause additional pressure on the individual investor as his planned outlay can change drastically in terms of interest payment.		The individuals should thoroughly clear the conditions with the issuing bank about the interest rate fluctuation in case of changes by the RBI. Some banks allow fixed interest rates forever, but that are slightly more than the market rates; but definitely more secured.
Expropriation Risk	Expropriation risk basically refers to the risk of a private property having used for a public purpose. This risk mainly applies to age-old dormant properties. Mega profit-generating realty projects in very unstable economies like African Nations also face this risk.		This risk can be done away with by being a bit cautious and vigilant for your properties. On age-old ancestral properties, susceptible to this risk, you should do a bare minimum construction time to time. This way it won’t be dormant anymore. In unstable nations, the company carrying out the project should proactively partner with the government in profits or other ways so as to reduce the risk of expropriation drastically.
Financing Risk	Borrowers for real estate investments often face the risk of financing, especially after the sub-prime crisis of 2008. The above mentioned interest rate fluctuations are also included in the gamut of financial risks. More on financing can be read in our earlier posts, which also covers the various ways of financing a RealT project: Financing - Funding a RealT [click here] Financing the RealT by Equity [click here]

These risks are prevalent in almost each and every real estate investment. Of course, the extent of different risks will depend on the size and nature of the investment. But if handled with a little more care, these risks can be minimized to a large extent and then even the Real Estate Investments will find their lost glory again.

---- Thanks for reading RealT Horizon. Your comments will help us improve our analysis. J ----

Small Investors: EMIs, JIs & Private Money can make it possible!

As promised, here we go with our views on the next 3 options for small investors in real estate – Joint Investments, EMI options and Private Lending. You might be aware of these vehicles already, but we hope to add few extra points to your knowledge. So here we go:

1.       Joint Investments 

No awards for guessing what joint investments are! Consider this scenario - You and your friend want to invest in real estate, but are short on money. There is a lucrative property deal available which is sure to yield heavy returns; what to do now??

Yes, pool in money and share the property!

Pooling funds for Joint Investment

The above shown scenario is not very uncommon. Every now and then we come across people struggling with this issue, especially small investors. Joint Investments open up gates in such cases and investors can earn profits from the deal which otherwise they would have let go. Joint investments need not be in equal proportions, but it’s preferred so as to avoid any conflicts. Two or more people can join hands for an investment in different proportions and later enjoy the returns in the same ratio.

What is more important in this type of investment is clear agreement between different parties. Having a pre-signed agreement ensures that rights of all the parties are safeguarded and any possibility of conflict is minimised.

2.       Private Lending 

This may look like a new concept for some of our readers. The most common perception of Private Lending as soon as one hears about it is – “get a loan from private lender and go for your purchase”

WRONG!

Private money lending is actually the opposite of what common man perceives. It is giving ‘your money’ to investment companies to invest in real estate and return you your principal and a pre-decided interest portion.

Private Money Lending mechanism

This form of investment is relatively less risky in terms of returns and efforts to be put in by the first time investor. But sure, there are some other issues attached with this form of investing. Some of them may be:

a.       Credibility of the Investment firm

b.      No clarity on the ownership of the invested property

c.       No secularisation apart from the letter of deed

These issues can be mitigated if a proper analysis is done prior to selecting a private money investing firm.

 3.       EMI Options

Yes we know that it is very rudimentary to talk about EMIs. EMI is the most widely used concept today, not only in the field of real estate, but in almost every field. But more often than not, small investors fail to see its utility and neglects EMI as an option for investment.

Take an example of a young professional who wants to make an investment but is perplexed due to obnoxiously high RealT prices. As a result, he continues to reside in a rental apartment and invest in other vehicles like stock market. If planned and calculated properly, he can very well invest in a real estate property, making full use of available EMIs and resources otherwise invested in other investment vehicles.

Disclaimer: The purpose of our above analysis is to bring forth the channels of investment for small investors and make them aware of their in-and-outs. We are not advocating or recommending any of these methods. It is the rationale of the investor who has to take decision while making an investment choice.

---- Thanks for reading. Your comments will help us improve our analysis :) ----

Real Estate for Small Investors, is it?

First of all, apologies for a delayed post this time. We were hooked up with some Real Big issues!

So tell us, where do you think is money in RealT Sector? Or is it just a fad & small investors can never make out anything from this sector?

As far as what we have concluded from our secondary research data, it seems that more than 65% of people are not interested in investing in real estate primarily because they think – “we require huge investments to buy a property!”

We would not completely deny this fact but at the same time, it doesn't entirely hold too. Before we go any further and clarify this ‘myth’, let us first give you a glimpse of where money lies in RealT Sector:

So as apparent from the above categorization (we are assuming that you are a normal investor with not much knowledge of other fields of real estate), there are several fields apart from transactions and development from which you can make money in this sector. Take for example Relocation Services. By relocation services, we mean that you can provide services to relocate people or businesses & arrange for accommodation and other services in case required by them. This will provide you with an opportunity to make some handsome amounts with fewer efforts.

Services like ‘Appraisal’ require technical know-how of how to value a given property. If you have the proficiency to do this, you can make this as your career and trust us, you won’t require anything else to pursue as your profession.

On the similar lines is another vertical – ‘Property Management’. As Portfolio Manager is to Stock Market, Property Manager is to Real Estate. And we think that we need not to reiterate how much fortune a Portfolio Manager makes! If you have some expertise and experience in the field of real estate, this is your place to be.

How can Small Investors invest in Real Estate?

This is probably the most important question that haunts every middle-class individual when he/she starts earning. With the rise of middle class population in India in recent years, people who just graduate from the universities look forward to invest in some vehicle. But due to unavailability of any structured or convenient vehicle for investment in Real Estate, the obvious choice that they are left with is – Stock Market or Fixed Deposits.

We would like to throw some light on how a mid-income group person or a small investor can invest & make money in this market. There are several measures available for this purpose, few of which include:

• Affordable Housing
• Attractive EMI schemes
• Joint Investments
• Private Lenders
• REITs

Within the scope of this post, we will just try to explain Affordable Housing & later we will take on other measures.

Affordable Housing

As per JLL’s report on ‘Affordable Housing in India – 2012’, there is no clear-cut definition of the term ‘affordable’. This is because it has different meanings in different scenarios as it is a relative concept. Just going by KPMG’s definition of affordable housing, it can be seen as:

	Income Level	Size of Dwelling Unit	Affordability
Economically Weaker Sections	<INR 1.5 lakhs pa	Upto 300 sq. ft.	EMI to Monthly Income: 30% to 40% House price to annual income ratio: Less than 5:1
Lower Income Groups	INR 1.5-3 lakhs pa	300-600 sq. ft.
Middle Income Groups	INR 3.0-10 lakhs pa	600-1200 sq. ft.

 
  Source:  KPMG

Affordable housing is a new concept which emphasizes on catering the needs of the above 3 mentioned income group individuals. The differentiation is based mainly on the size of dwelling unit and the location of the unit.

Small investors, typically falls under the umbrella of Middle Income Group. There are a number of trusted and reputed players in the business of affordable housing all over India, mainly in the metropolitan cities where the concentration of LIG’s and MIG’s is maximum:

Source: JLL Research, 1Q12

Closing Remarks: It is said “where there is will, there is way..” This falls apt in case of real estate investing. Though seemingly very tough, it becomes simple if you want to devise ways in this sector. And believe us, the pace and size of returns which you can expect from real estate is far more than any other investment.

---- Thanks for reading J ----