Real Estate Investment for Rental Income

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Rental Income

RENTAL INCOME has always been one of the most preferred alternative income considered by the large Indian middle class. It is considered as an aspirational GOLD especially when you look at the salaried class approaching its retirement. One of the best ways to secure your retirement is invest in an additional property that can give you rentals when you retire or build another floor to rent it out and provide you that extra security cover. In this article, I am highlighting the pros and cons of investing in Real Estate for Rental Income.

Typically in India  the rental rates vary between 1.5% - 3% of  the current  market value of your residential property  and 7 – 11% of your commercial property.

Pros:

·         It generates regular income month on month

·         It is protected from inflation as it increases with the rise in overall price index

·         It gets you tax benefits (e.g depreciation benefits)

·         It can cover your incremental mortgage costs

·         Your capital is intact and grows over a period as the price of the property goes up.

Cons:

·         It involves high maintenance cost for  the upkeep of  the property

·         Risk of empty units

·         Dead-beat tenants

·         Typical pitfall of the illiquidity of the asset

·         Loans are not very easy to get by for a commercial property.

If you wish to invest in the rented property, do be cognizant of the above factors apart from the other factors highlighted in my earlier articles before you invest. It is advised to express restrain on investing in rented properties against the bank loans. Also ensure that you keep at least six months' worth of reserves on hand in the event you fail to find a renter.

Thank you again for taking out your time and reading this article. Do write back to me with your feedback and if you found this  article helpful.

Real Estate as a part of your Asset Allocation

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Real  Estate as a part of your Asset Allocation

Before I pen down my ideas on the above subject, let’s understand what asset allocation is.

Asset allocation is an investment strategy that aims to balance your risk and reward by apportioning portfolio’s assets according to individual’s goals, risk tolerance and investment horizon. The main asset classes are:

equities,

fixed-income,

real estate,

gold and cash and cash equivalents;

 Each of these have different levels of risk and return, so each will behave differently over specified time horizon. Allocation of capital to different asset classes is one of the most important decisions in determining the future risk taken and overall returns generated by the total portfolio. The returns are volatile in nature including positive and negative returns and the same hold true for real estate as well.

In my previous article, I had highlighted the importance of having real estate in your investment portfolio. Let me give you some of the pitfalls of investing in real estate and thus we should avoid going overboard on it and have a balanced portfolio.

Pitfalls of Real Estate:

·         There is a general myth that the real estate prices never fall. The reality is that real estate like any other asset tool has its cycle of ups and down when the prices go up based on the demand and goes down when the demand is low. The Real estate prices in NCR region alone have corrected by 25% in last 2 years. As it is a high capital asset class, a correction of such magnitude has a significant impact on our net worth.

·         It gives you steady rental income that grows over time but the rental returns are good in commercial properties (8 -12%) against the residential property that gives you the rental return of 1.5% - 3%.

·         It saves on tax. Actually it is the residential property where you get the tax exemption while there are no tax benefits on the loan against the commercial property. This deduction also is added back to your taxable income if you sell the property within 5 years of taking the possession of the house.

·         As it is a high capital class, the liquidity of the asset is difficult. This asset cannot be used for emergency needs or urgent fund requirements.

Taking all the above factors into consideration, please use your discretion while investing into real estate. Some of the Investment Opportunities that Real estate offers are:

·         Capital Gains

o   while participating at the launch stage of property and taking advantage of value appreciation

o   Participating in auctions of the stressed assets. (Generally for the HNIs)

o   Cyclical or periodic appreciation of the property

·         Rental income The returns on a residential property range anywhere between 1.5% - 3% of the market value of the property while the rental returns on the commercial premises range between 7% - 12% depending on the market demand. The interest on the loan on residential property can be deducted from rental income in the same property and gives added tax benefit.

·         NCD: The real estate sector is still considered amongst the riskiest of the sectors and the developers find it difficult to raise required funds. This opens up the opportunity to invest in high yield debt instruments like NCDs (non-convertible debentures) floated by these developers. The risk of investing in these NCDs is higher than the normal debt and needs to be taken into consideration before investing.

·         Reverse Mortgage: A reverse mortgage is a loan that allows older homeowners to access the equity in their homes. Instead of making a mortgage payment to reduce your debt, you receive money and increase your debt. Reverse mortgages are an option for people who want to turn substantial home equity into cash

·         A REIT, or Real Estate Investment Trust, is a company that owns or finances income-producing real estate. Modeled after mutual funds, REITs provide investors of all types regular income streams, diversification and long-term capital appreciation. REITs typically pay out all of their taxable income as dividends to shareholders. In turn, shareholders pay the income taxes on those dividends.

I will deal with details on all these opportunities in my subsequent posts. Thank you again for taking out your valuable time to read this post. Await your suggestions and inputs.

Investing in Real Estate - Why?

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Investing in Real Estate

In this edition of my blog, I wish to share my thoughts on why real estate should be an important part of your investment portfolio and what are the options available in India.

Investing in real estate involves purchase, ownership, management, rental and/or sale of real estate for profit. Real Estate has traditionally outperformed the equity markets. Micro market knowledge of the market makes it perfect for small savvy investors. Large institutions lag behind trends. Real estate is an asset form with limited liquidity relative to other investments, it is also capital intensive (although capital may be gained through mortgage leverage) and is highly cash flow dependent. If these factors are not well understood and managed by the investor, real estate becomes a risky investment. The primary cause of investment failure for real estate is that the investor goes into negative cash-flow for a period of time that is not sustainable, often forcing them to resell the property at a loss or go into insolvency. But still I would like to list few reasons that work in favor of real estate investments:

1. Gain more leverage. Real estate is one of the few investment vehicles where using the bank's money couldn't be easier. The ability to make a down payment, leverage your capital, and thus increase your overall return on investment is incredible.

2. Tax free cash flow. It's no secret that because of depreciation and mortgage interest deductions (if you leverage your capital), your cash flow should be tax-free. That's right! The far majority of the time an investor will never pay taxes on their cash flow and can wait for capital gains on the sale of the property in the future.

3. The tax write-offs against your other income. Depending on your income level, there is a good chance your rental property will not only give you tax-free cash flow, but an overage of tax deductions you can use against your other income. With that said, this is something you want to discuss with your tax professional before investing so that your expectations are realistic.

4. Increased tax deduction strategies. Rental property affords investors with another incredible opportunity to convert personal expenses to potentially valid business deductions. Don't forget that rental real estate is a business. This means that travel expenses to check on your properties and payments to family members who manage your properties (such as students away at college) can be deductible and increase the tax benefits when it comes to cash flow and the future sale of the property.

5. Rental real estate is a retirement plan. Buying a rental property is a significant commitment that you are required to commit to and maintain. You will always be grateful in the long-run when you don't give up on it and build future cash flow and wealth.

The far majority of us will never get rich overnight. It takes long-term investing and a diverse portfolio to build true wealth. Don't forget real estate as an important part of the equation.

Home Buying Expenses - Costs often Ignored

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You've crunched the loan rates, estimated your tax payments, and taken a realistic look at how much house you can afford. You've stuck within your range, being careful not to bust your budget.

But there are more expenses involved in home buying than just the property costs. And those additional payments, if you don’t factor them in, can be high enough to derail your meticulous planning.

Home-Buying Expenses: Add Them Up

Buying Costs You've got your loans pre-approved, but that’s not all you will need to fork over to get the keys to your new place. Services that need paying could be:

1  Your buyer’s agent fee

2  Property tax that may be pending

3  Payment of the fees to local home owners’ association or Resident welfare housing society

Moving Costs Moving into a home can involve major expenses for packing, storing and transporting your possessions and yourself. If you are moving across the country, the costs could be significant. Even moving across town can cost more than you planned for truck rental, movers and equipment.

Utilities Setting up your telephone, electricity, gas and water—did you budget for these expenses? They could cost more at your new place, especially if you’re moving to a larger home or from a rental.

New Stuff You may need to purchase appliances or furniture for your new home. Some items, like your old particle board bookshelves, may not be worth the cost of moving. Again, if you are sizing up, you face the potentially fun, but possibly financially draining, challenge of filling the new place.

Maintenance and Renovations A standard rule of thumb is to budget at least 1% of your home’s purchase price each year for home maintenance costs. Maintenance can include things such as painting, replacing roof shingles, fixing or upgrading plumbing and wiring. The amount you will need to pay for maintenance can depend on the age of the home, the previous owners’ upkeep and the climate.

Home-owner's Insurance You won’t be able to obtain a mortgage without home-owner’s insurance covering both the property and its contents. However, the standard insurance may not cover natural disasters such as floods and earthquakes. Depending on where you live, you may want to consider taking out additional insurance to cover such risks.

Please remember that all these costs put together can simply stretch your budget by 10-15%.

Make a decision to buy your own House - Take a Plunge

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You’ve saved for a down payment. You’ve pored over the local listings for months. Visiting houses has become part of your weekend ritual. But months, perhaps years have passed and you are still in your rental house.

For many first-time homebuyers, pulling the trigger on a purchase can be a frightening experience. Will you be happy there? Will you like your neighbors? Will you be tied down—house rich and cash poor? What if you lose your job? Will you hate your commute? In short, your fears stem from the unknown.

Still, there’s hope. Your family, friends and co-workers took the leap and are reaping the benefits. Give these steps a try and you could be one of them:

Firm Up Your Finances Anticipate the new costs that you will incur, such as taxes, homeowners insurance, utility bills and commuting. This will help determine the maximum price you can spend on a house. If your daily budget will change with a new home, consider a trial run living on that budget for a few weeks, to make sure you can. Enlisting the help of a financial expert will give you an objective view of your finances. Remember, the first year is the most difficult. After that you will begin receiving tax benefits.

Partner With an Agent Even though the Internet gives you access to endless amounts of market information, don’t be tempted to go it alone. Instead, interview several real estate agents and find one you like who listens to you. He or she can line up properties to view, answer many of your questions and make connections for you in your new community. Agents often have the inside track on new properties just coming on the market.

Accept Some Risk Realize that there is uncertainty in everything, but no matter what happens, you will deal with it. Ask family and friends about their experiences and learn from them. Be sure to keep some cash reserves in the bank as a safety net. And remember, you have homeowner’s insurance for a reason.

Fine Tune Your ‘Must-Haves’ Is there a community that you absolutely must live in? Are you adamant about a view or a floor? Make your list of what’s vital. You may find that you are willing to sacrifice one feature if the rest are fabulous. If you are not crazy about the house, don’t bid. It’s important that you love it at the outset.

Take a Plunge Regardless of the market, great houses do not stay available for long. If you love it, be ready to take a plunge. If you are wavering, ask yourself, “How will I feel if I don’t get this house?” You might just get it.

Reap the Reward Owning a home can be one of the most exciting and satisfying things you will do in your life. It’s an investment that can pay you personal dividends as well as financial benefits

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How to start when you want to buy your own House

Buying a house is one of the biggest investments that one makes in his/her lifespan. Therefore it requires all the due diligence and homework. Present below are some of the key questions that one must ask to have a safe transaction:

Title: Do not buy a house/property if the title is not clear as the financial institutions refuse to finance such properties and may cause problems in the future. The best way is to approach a consultant or financial institutions to know whether the title of the house/property is clear.

Documents: Ask the builder whether he has all the documents relating to the property of the house. Take duplicate copy of the same and have them verified with a property lawyer.

Approved Layout: Ask for a copy of approved layout of the building from your builder or seller of the property. Ensure to buy a house that has the building and construction plan approved by the respective municipal authorities and the property is termed as NA (non agriculture). Also ensure that the land is not a trust land, forest land or in possession of some other body.

Intimation of Disapproval (IOD): IOD is set of instructions, given by the respective authorities to builders for constructing the building in a minimum period of time. Ask the developer for the same.

Water & Power: Pls check from the builder whether the property has adequate water supply and there is no problem of power such as voltage fluctuation etc. Voltage fluctuation can cause severe damage to your home appliances and put stress on water as well.

Facilities: First things first. Ask the builder for the access roads and nearby facilities. Though it is the  responsibility of the government to provide for roads, ask the builder if there is a plan passed by the local municipal corporation for such access roads. Also ask for the internal facilities like lift, garden, parking, and other amenities that may have been advertised for. Ask him the time it will take to provide for  those facilities. Also ask for  the additional cost that one will have to bear for such facilities.

Quality of construction: Ask  the builder for the quality of material used in the construction (quality of the internal walls, flooring, sinks, bathroom fittings etc.). You may check some of the other constructions of the same builder and have a look at a sample flat. Also ask, if the material used in sample flat will be the same as in original flat.

Factor in all expenses: Last but not the least, consider all costs included in the purchase of the house. Generally, buyers are informed about the marketable rates. Please ensure to check all other costs involved. Some the important costs incurred for buying a property are: floor rise and premium location, parking charges, registration and stamp duty, service tax, notary and legal expenses. Also ask the  terms and conditions for the payments very clearly. Also important to know is about the maintenance cost and the actual time when the payment starts.