Real Estate Investment in India: Is It Right for You?
Are you intimidated by real estate investment in India? You shouldn’t be. Real estate investments are one of the most powerful and profitable investment strategies available today. In fact, Gallup surveys find that people have considered real estate the best long-term investment for eight years in a row.
Here’s the best part: you don’t need to be a seasoned pro to get started. You don’t even need prior real estate experience, because there’s so much more to it than owning a home or flipping houses. You can be as active or passive of an investor as you’d like, while still enjoying a steady passive income stream, tax incentives, leverage, and long-term growth.
Benefits of Real Estate Investment in India
1. Cash Flow
For real estate investors, cash flow is the income left after paying out expenses such as the mortgage, taxes, insurance, vacancies, repairs, capital expenditures, utilities, and any other expenses that affect the property. If you have renters, your goal is for the rent you pull in each month to exceed your expenses, resulting in a positive cash flow. Your cash flow will typically increase as you purchase more properties and increase rents to keep up with current market conditions.
2. Mortgage Principle Paydown
When you get a loan for a property, you make a mortgage payment every month. Principle paydown is simply the part of the mortgage each month that is applied to the loan balance instead of the interest.
3. Capital Appreciation
Appreciation is the increase of a real estate property’s value over time, and alongside long-term buy/hold passive income, is how investors make most of their money. Despite inevitable fluctuations, real estate values have consistently increased, and that’s unlikely to change.
4. Leverage:
Real estate leverage is when you tap into borrowed money such as conventional loans, personal loans, or other assets to expand your potential return on investment. It is one of the best ways to get started in real estate investment in India, especially when you do not have enough capital of your own. There's one more way to get started in real estate investment with less money - Fractional Ownership of Real Estate.
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5. Depreciation
Tax benefits are abundant in real estate investing, and depreciation is key among them. The IRS views properties as assets, just like cars. Depreciation covers an asset’s “wear and tear” over time. When a property is purchased, the cost of the property can be depreciated over a period of 27.5 years for residential properties and 39 years for commercial properties.
6. Hedge Against Inflation
Real estate investors hedge against inflation in several ways: property values generally rise at a rate higher than inflation, and rent generally increases to keep up with inflation. Also, fixed-rate loans mean your monthly mortgage payments remain the same, despite inflation.
Calculations (in INR)
Take this case for an example, you just purchased a single-family home priced at ₹30,00,000 with the intent of renting out this property as a long-term buy/hold investment.
Leverage: Let’s say you, the investor, made a 20% down payment of ₹6,00,000 and obtained a mortgage loan of ₹24,00,000 to purchase the ₹30,00,000 home. In this case, the investor is using leverage of 4:1, meaning they are using ₹24,00,000 of borrowed money to control a property worth ₹30,00,000.
Appreciation: If the value of the home increases by 5% in one year, the value of the home would be ₹31,50,000. In this case, the investor’s equity in the property would increase by ₹1,50,000, which would be the appreciation on the home.
Mortgage Principal Paydown: Assume the mortgage has a 30-year term and the interest rate is 3.5%. If the investor makes payments on the loan from rent received by the tenant, over time, the balance of the loan will decrease, and the investor will continue to build equity in the property. For example, after five years, the outstanding balance of the loan would be roughly ₹21,80,000, and the investor’s equity in the property would be approximately ₹82,000 (assuming no appreciation in the property value occurred).
Cash Flow: Assume the investor rents out the property for ₹15,000 per month, and the monthly expenses, including the mortgage payment, property taxes, insurance, and maintenance costs, equal ₹12,000. In this scenario, the investor would generate ₹3,000 in positive cash flow (₹15,000 – ₹12,000) each month.
Depreciation: To calculate depreciation, divide your property’s value by 27.5 years for residential properties. If your duplex is worth ₹80,00,000, your depreciation expense is ₹2,90,909 (₹80,00,000/27.5). In this scenario, you would save ₹7,272.75 (₹20,000 – ₹12,727.25) in taxes, all thanks to depreciation. That’s more than ₹600/mo!
New to Real Estate Investment in India? Check out our Beginners Guide to Real Estate Investment in India.
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How does Real Estate Investing Compare to Other Types of Investment Options?
1. Stocks and Mutual Funds
Real estate and stocks both offer the potential for returns on investment. In the case of stocks, the median return for the S&P 500 has been around 8.6%. Investors in both real estate and stocks can diversify their portfolios by investing in multiple assets simultaneously.
However, the stock market is known for its unpredictability and volatility. Investors may witness substantial gains, only to see them erode due to market fluctuations. In contrast, real estate investments tend to be more stable and predictable, making them an attractive option for those seeking more consistent long-term growth.
2. Fixed Deposits (FDs) and Bonds
Fixed Deposit (FDs) are considered low-risk, low-reward investments, and their returns are closely tied to prevailing interest rates. While FDs provide a degree of safety, the returns are often modest when compared to real estate investments. Real estate investors enjoy various tax benefits, such as depreciation and leverage, which are not applicable to FD investors. Current average annual percentage yields (APYs) for FDs in India typically range from 5% to 7%, according to Bankrate.
Bonds share similarities with FDs, as they offer minimal returns and limited tax advantages compared to real estate investments. In the Indian context, real estate tends to outperform bonds and FDs, making it a more appealing option for those seeking higher returns and tax benefits.
3. Gold
Gold has a historical track record of appreciating in value over time. However, gold's growth is relatively slower than that of real estate investments. Moreover, investors have little control over how quickly their gold investments accumulate wealth. Real estate, on the other hand, allows investors to actively enhance the value of their properties through various means, such as property development, renovation, and strategic management.
Why Real Estate Investment in India Stands Out
Real estate investment in India has gained substantial traction due to several factors that make it an attractive choice:
1. Tangible Asset
Real estate investments offer the advantage of owning tangible assets. In a market like India, where property ownership holds cultural significance, real estate provides both financial security and emotional value. Unlike stocks or bonds, you can see, touch, and utilize your real estate investments, such as residential or commercial properties.
2. Steady Cash Flow
One of the significant benefits of real estate investment in India is the potential for steady cash flow. Rental income from properties can provide a regular income stream, helping investors cover property expenses and generate surplus income. Unlike stocks, which rely on market performance, real estate investments can yield consistent returns through rental income.
3. Long-Term Appreciation
Real estate values in India have shown a consistent upward trend, offering long-term appreciation. While there may be short-term market fluctuations, real estate has historically been a reliable wealth-building asset. This makes it a preferred choice for individuals seeking to create long-term wealth.
4. Tax Benefits
Real estate investors in India enjoy various tax benefits that can significantly enhance their overall returns. Tax advantages such as depreciation and the ability to deduct property-related expenses can reduce the tax liability of real estate investors, leading to greater after-tax profits.
5. Control and Diversification
Unlike some investment options where your money is managed by others, real estate investments provide you with direct control. You can actively manage your properties, make strategic decisions, and enhance their value. Additionally, real estate investors can diversify their portfolios by investing in different types of properties, such as residential, commercial, or industrial real estate.
Return on Real Estate Investment in India
Your return on investment (ROI) can vary substantially based on your experience, location, investment type, and numerous other factors. However, real estate investors usually build more wealth than they would with other types of investments.
Here are the average annual ROIs for the most common types of Real Estate Investments in India:
- Residential Real Estate: 10.6%
- Commercial Real Estate: 9.5%
- Real Estate Investment Trusts (REITs): 11.8%
Who Can Invest in Real Estate?
Not long ago, investing in real estate was only an option for people who could afford to put 20% down. Luckily, a lot has changed in the last couple of decades. Almost anyone can invest in real estate, and sometimes with little to none of their own money!
Conclusion
In conclusion, real estate investment in India is a compelling option when compared to other forms of investment. It offers the potential for steady cash flow, long-term appreciation, tax benefits, and direct control over your assets. As the Indian real estate market continues to evolve and grow, it presents investors with attractive opportunities for building wealth and securing their financial future. If you're considering investing in India, real estate is a path worth exploring. Don't miss the chance to harness the unique advantages it offers in this dynamic market.
Is real estate investment in India the right choice for you? Explore the various opportunities it presents and decide how you can make the most of this thriving market. In your pursuit of financial prosperity, remember that real estate can be a powerful vehicle for achieving your investment goals. So, are you ready to take the leap into the world of real estate investment in India? The potential for Rewealth awaits those who embrace this exciting journey.
Now, it's your turn. What are your thoughts on real estate investment in India? Let us know your thoughts in the comments below!
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