Property, your ultimate gateway to wealth and prosperity
While there are a large number of investment options available in the market, right investment in right property is finally the Big Challenge for all. Amongst all the options available to a retail investor, it is finally investment in property that makes serious money for us. Invested with due care and after a thorough research, returns from property have the ability to outclass any other investment avenue. However, as a general rule, an investment should go into the property only after one has purchased / built / got allotted a house/flat for himself for personal residential purposes. Thus, what we talk about in the text to follow is investment in property for the sake of generating rental and/or capital appreciation, and not for your own home where you plan to stay yourself.
Drawbacks of Investing in property
The biggest drawback of investing in property is that the requirement of lump-sum money is higher than in any other form of investment. However, that can be overcome with some planning wherein home loans can be taken and/or investment can be made in property under construction so that the outflow of money is in small construction-linked steps which is much easier to handle. Another drawback is that, if due care is not exercised initially while choosing the property, the loss suffered may be very heavy – even heavier than in any other investment.
If this most important rule is taken care of by a thorough research in the beginning, most of the later disappointments are already taken care of. Other minor rules to watch out for are:-
- Clear land title.
- Reasonable cost of acquisition as per the prevalent market price.
- Real (and not imaginary) reasons why rates should increase in future.
- Availability of buyers for your property in foreseeable future when you plan to sell it.
It is reiterated that any hasty decisions taken while acquiring a property is a case of ‘Acting in haste and repenting at leisure’. Initial research is always a time well-spent. Do not ever let a broker or sellers unduly hasten you up by projecting that the property is ‘hot’ and will not be available tomorrow! It is better to let that ‘hot potato’ be handled by somebody else in most cases!!
Start small initially, keep building up your appetite for risk and gain experience by selling and re-investing in steadily bigger-ticket purchases. Home loans is another good source – they can be pre-paid if you have been careful to take one that levies no or minimal pre-payment penalties. One can tap into his Provident Fund account if it has a large balance – there is no point in keeping a very big sum there since it earns merely 8% per annum. This rate normally either just about equals inflation or may even be below the inflation rate prevalent at that time, implying that your money is either not growing or losing its value steadily!! However, please remember that your money is relatively secure in avenues like Provident Funds and it is good for financial prudence sake to keep 10-20% of your overall wealth in such an asset class (Provident Fund, Debt Mutual Funds, FDs, RDs, Post-office deposits etc).
Is Real Estate a Good Investment?
Real estate is a great investment option. It can generate an ongoing income source. It can also rise in value overtime and prove a good investment in the cash value of the home or land that you buy. YOu may use it as a part of your overall strategy to begin building wealth. However, you need to be sure that you are ready to begin investing in real estate.
Many advisors warn against borrowing money to purchase investments. You should consider this before you purchase a home that you plan on renting out. The best way to do this is to save up and pay cash for the home. At the very least, you need to be able to afford the payments on the property when the property is vacant, otherwise the property may end up being a burden instead of helping to build wealth.
A well chosen property is likely to deliver greater return in the future; not only in the form of capital growth but also in the form of rental returns. In order to maximise investment return, here are some key considerations to make:
The Right Stage of the Property Cycle
The property market moves in cycles. Property values may rise due to strong market growth, remain steady or even decline during certain phases of the cycle. Thus, as an investor it is important to know where the market is within the cycle to ensure you secure your property at the right price.
For more information on the property cycle, refer to ‘Understanding the Property Cycle When Buying’, page 7 of this guide.
The Right Location
Location is integral to acquiring a good investment property. If the location is chosen correctly, the chance of gaining higher returns from your investment is far greater than if the location is not desirable and suitable for those looking to live close to amenities. Factors to consider are:
Close proximity to certain amenities increases the desirability and value of a location and property; these include:
- Schools
- Public transportation
- Public facilities (post office, libraries, parks, medical centres, etc.)
- Shops and markets
- Lifestyle activities (restaurants, café strips, beach, etc.)
Therefore, it is important to consider proximity to these when buying your investment property.
- When selecting an area to purchase a property in, try to avoid those that are likely to be dependent on a sole industry i.e. manufacturing. Although it can be beneficial when the industry is doing well, if it falls, your property’s value may decline as a result.
- Some of the best places to buy are those experiencing population growth. As population grows, infrastructure improves and the desirability of an area increases.
- Living within close proximity to a major city (i.e. 10 kilometres) is always highly sought after. Whilst many of these suburbs attract higher prices, look for emerging suburbs which may have strong growth potential.
The Right Property
When searching for an investment property, you should aim to secure one which will be in continuous demand by tenants, as well as future home buyers. One factor you should consider is appropriateness of the property for the average age of residents in the area.
It is therefore important to do some research to discover the demographics of your area of choice and determine what is important to this demographic. For example, if you are buying in an area with an older community, do not purchase a property with a staircase or an inconvenient layout.
The Right Return
Many property investors make the crucial mistake of choosing a property based on emotion, rather than finances and logic. A bad purchase may result in capital growth below the market average or rental income which does not come close to covering the monthly costs to maintain the property. It is therefore vital to do your research to establish your strategy before making a purchase.
Researching the Market
Over recent years a number of web sites have been established to enable consumers to access current sales results and historical sales data. This information will assist you to gain a good grasp of current market trends and historical growth patterns. Some of them include;